RYAOF - Ryanair Stock Falls But Strong Buy Signals Flash

2023-07-24 14:08:25 ET

Summary

• Ryanair's Q1 FY2024 results show solid growth with an 11% increase in passengers and 40% jump in revenues.
• Despite strong results, Ryanair's stock fell due to uncertainties in Q2, potential fare reductions in the winter season, and a reduction in passenger outlook due to Boeing delivery delays.
• Despite these challenges, I believe Ryanair stock remains attractive due to its low-cost model, net cash position, and potential for growth in a high interest rate environment.

While a heatwave is spreading through Europe, Ryanair ( RYAAY ) has announced its first quarter FY2024 results. I'm currently preparing this report from my office where we're being hit by the heatwave as well. While heatwaves can be a problem to demand for air travel, the bigger problem still seems to be driven by supply side constraints and are reason for Ryanair stock to trade nearly 8% lower today. I'll analyze the first quarter results and outlook and establish a price target for the stock.

Ryanair Indicators Continue To Improve

The results that Ryanair posted for the first quarter continue to show solid growth. The company carried 11% more passengers on a three points improvement in load factor. Revenues jumped by 40% helped by a favorable comp (Ukraine invasion in the prior year and an additional holiday in the UK this year) and largely reflected the 42% jump in base fares and an additional 15% growth in ancillary revenues. Operational costs rose 23% reflecting €300 million or 30% higher fuel costs as well as higher input costs and 8% more sectors flown and 11% more traffic.

Ryanair currently has a liquidity of €4.84 billion, which allows the low-cost carrier to easily repay the bonds due August 2023 as well as capex for FY24. Even then, there's space to repay the bonds that mature in 2025 and 2026 though Ryanair will be using its cash pile to finance its deliveries, so I wouldn't think the airline would be extremely eager to retire debt early even though it would save on interest costs. The willingness and ability to finance purchases partially with cash brings Ryanair some benefits as financing costs are higher in the current interest rate environment.

Why Did Ryanair Stock Tank?

While the results are certainly good, Ryanair stock has tanked post earnings and there are various reasons for that. The first reason is that the company sees some uncertainty in Q2 and only was able to guide non-quantitively for Q2 as exact results depend on the closer-in fare strength. Furthermore, due to a more challenging comp the Q2 growth will be moderated compared to the Q1 YoY figures. The company also said that in order to support its 25% higher capacity it will have to engage in some fare stimulation this winter season. In normal words this means that fares will drop during the winter as Ryanair will be discounting to fill the seats and that obviously puts some doubt on whether the high fare environment will last and how that will carry on into the subsequent summer season. Furthermore, the company has guided down on its growth this year from 185 million passengers to 183.5 million passengers due to Boeing ( BA ) delivery delays. This does not come as a huge surprise as I already flagged the risk during the previous earnings analysis.

Are Ryanair shares a good buy?

While Ryanair has been cautious on Q2, hints on fare softening during the winter season and has reduced its outlook for passengers carried in FY24, I do believe that share remains very attractive. The company is in a net cash position, and we see low-cost carriers becoming more and more becoming preferred over legacy carriers on the European routes. With the projections for this financial year put into the model, we see that both the industry median and the company median suggest around 30% upside. As a result, I'm putting a strong buy on Ryanair stock.

Conclusion: Ryanair Stock Remains Attractive

I believe that Ryanair stock remains attractive, driven by the low-cost mindset that the airline has and successfully executes. Ryanair's stock already has gained significantly since I marked it a buy last year, namely over 40% compared to 15% for the broader market, and I believe that based on the projections for FY24 and FY25 more upside remains. Fares might weaken during the winter season, but overall the industry remains constrained from supply side, and with a net cash position Ryanair has a superior position when it comes to financing growth in a high interest rate environment, giving the company flexibility to keep costs down and that's definitely not a position that all low-cost carriers are in.

For further details see: