This stock’s 67pc share price gain is just the beginning of its good run

Questor inheritance tax portfolio: An improving operating outlook and a low valuation suggest further capital gains are ahead

The end of the cost of living crisis is on the horizon. Inflation declined by 0.8 percentage points to 7.9pc in June, which is its lowest level since March last year. 

With recent interest rate increases yet to have their desired effect on the pace of price rises due to the existence of time lags, inflation is poised to fall much faster than many investors anticipate. 

Indeed, the Bank of England expects it to be just 2.8pc by the third quarter of next year.

A lower rate of inflation will ease pressure on consumers after what has been an incredibly challenging period. 

With long-term interest rates likely to settle far below today’s levels, according to the IMF, and the UK’s economic growth rate expected to increase from its present low ebb, the prospects for consumer-focused stocks such as travel firm Jet2 are set to dramatically improve.

Of course, the company has weathered the cost of living crisis and the pandemic extremely well. 

Its shares have risen by 67pc since being added to this column’s inheritance tax portfolio in January 2018, which is a significantly better outcome than the FTSE Aim All-Share index’s 29pc decline over the same period.

The firm’s solid financial position has been hugely beneficial during a turbulent period for the travel and leisure sector. 

Its net debt-to-equity ratio (excluding customer deposits) stands at just 25pc, while net interest costs were covered over 15 times by operating profit in its most recent financial year. This shows that it is well placed to overcome any further industry-related challenges.

Results for its most recent financial year, which were released last month, represented a vast improvement on both the prior period and the 2020 financial year that immediately preceded the pandemic. 

Revenue, for example, was 40pc up on its pre-Covid level. Adjusted pre-tax profit was 48pc higher than the pre-pandemic figure, with improving consumer confidence being a key catalyst.

Although UK consumer sentiment declined in July following five consecutive months of improvement, holidays are unlikely to be negatively affected. 

For many people, an annual holiday is viewed as being more akin to a staple item rather than discretionary spending. With Jet2 focused on the relatively resilient package holiday segment that is viewed by many consumers as offering good value for money, the company’s near-term performance is likely to be robust.

Moreover, package holidays offer higher margins than flights and accommodation booked separately. Since they make up 73pc of the firm’s sales for this summer, which is a five-percentage-point rise on last year, the outlook for the company’s profitability is upbeat.

An improving financial performance means the firm can invest for long-term growth. During the previous financial year, it ordered an additional 35 aircraft so that its total order with Airbus stands at 98 planes. 

It recently took delivery of the first of these aircraft, which offer a significant improvement in passenger comfort and fuel efficiency. This could help to strengthen customer loyalty in what is a highly competitive industry, while aiding margins.

Growing profits also prompted a resumption of dividends following their suspension during the pandemic. Although the stock only yields 1pc, and is therefore of no interest to income-seeking investors, a resumption of shareholder payouts highlights increasing management confidence in the company’s future prospects.

On the topic of management, Jet2’s executive chairman, Philip Meeson, announced last month that he will step down from the board. 

Although this introduces a new risk to investors, since he has been a key part of building the business from a small base over the past 40 years, the company’s low valuation means its overall risk/reward opportunity remains highly appealing.

Jet2 currently trades on a price-to-earnings ratio of just 8.9. This suggests that investors have fully accounted for not only the threat to financial performance posed by major management changes, but also ongoing economic uncertainty.

Therefore, the stock offers significant scope for capital growth over the long run.

With the UK economy’s prospects widely forecast to strengthen as inflation falls and interest rate rises abate, consumer-focused companies are set to benefit from improving investor sentiment.

Because of its solid financial position, its wide margin of safety and sound strategy, Jet2 remains a very worthwhile portfolio holding.

Questor says: hold

Ticker: JET2

Share price at close: £11.26

Update: Blancco 

This software company, another member of our IHT portfolio, received a takeover offer this week. We will cover developments in more detail in due course.


Read the latest Questor column on telegraph.co.uk every Tuesday, Wednesday, Thursday and Friday from 6am

Read Questor’s rules of investment before you follow our tips