2023-10-27 10:28:30 ET
Summary
- Ryanair Holdings plc's stock has gained significantly since the start of the year, raising questions about the sustainability of its surge.
- The company has seen improvements in core KPIs, including its load factor and traffic.
- Ryanair's low-cost service and strong financial position mean it is well-positioned to navigate a waning consumer environment. In fact, Ryanair may benefit from a substitution effect amid weakening consumer sentiment.
- The stock's relative valuation multiples are highly appealing, suggesting the stock provides a good entry point.
Ryanair Holdings plc ( RYAAY ) presents an exciting topic of conversation as consumer sentiment seems to be at a crossroads. Moreover, factors such as input costs, elasticity of demand, and the sustainability of the airliner's trend growth all add to a cumbersome analysis.
From a market-based perspective, the airliner's stock has gained by nearly 20% this year , which naturally raised the question: Is Ryanair's year-to-date surge sustainable?
Let's delve into a deeper discussion about the Irish airliner's prospects to address the central question.
Improvement of Core KPIs
Ryanair has benefitted from post-pandemic reopenings better than most other airliners. The company is operating at approximately 125% of pre-COVID capacity, which has relayed into Ryanair's revenue, which settled 51.78% higher in Q1 to reach an adjusted figure of $4.04 billion.
Furthermore, Ryanair's load factor has increased substantially in the past year, extending to 95% from 92% a year ago. In our view, the load factor will be hard to sustain as Ryanair plans to increase its fleet by a substantial amount in the next three years. On top of that, short-term variables could play a role. For instance, load factors can be seasonal, which must be considered in tandem with the fact that the Northern summer holidays have just ended.
I wanted to add a bit more color to the significance of Ryanair's fleet expansion.
Despite its low-cost offerings, Ryanair possesses superior profit margins to the rest of the sector. Adding additional units to its fleet may enhance the firm's economies of scale, which could ultimately lead to further offering price reductions. If such an event had to occur, Ryanair would most likely raise the barrier to entry so high that it might corner the low-cost travel market.
Lastly, for this section, a glance at the key line items on Ryanair's balance sheet.
As an airliner, the company naturally has abundant fixed assets on its balance sheet. However, it is interesting to see that the assets net out liabilities quite comfortably, given that many airlines loaded up on debt during the pandemic. In addition, the company has a strong cash position, enhancing its short-term liquidity.
What I drew from its balance sheet is that Ryanair possesses the capacity to enhance its fleet without straining its financial position. Moreover, the company has the latitude to sustain shareholders' residual value while committing to a CapEx roadmap, which is crucial for its stock to sustain its performance.
Affordability In A Waning Consumer Environment
Ryanair is the second most affordable airline in Europe. Sure, there is a trade-off between cost and quality. Nonetheless, price matters with most consumer services.
As within the U.S., European consumer confidence has dipped in recent months. Even though consumer sentiment remains beyond 2022's levels, a recent decline is worrisome, considering that interest rates have peaked, which usually leads to economic softening.
Fortunately, Ryanair's low-cost service is well-placed to deal with weakening consumer sentiment. In fact, the airliner might actually benefit from the decline if consumers start searching for lower-cost avenues to cut back on expenses.
A Word on Input Costs
Fuel prices are volatile, but the general trend seems to be downward. I'm aware that short-term non-core inflation has risen once more; however, keep in mind that price trajectories don't move smoothly; they have their ebbs and flows.
Ultimately, we believe high effective interest rates and the natural economic cycle will lead to compression of oil prices and wages alike, lending airliners an opportunity to reduce their cost structures.
Valuation
Ryanair doesn't pay any dividends, which I think is a good feature of its stock as the company is still in its growth phase and needs to utilize its retained earnings to reinvest in the business. However, the company has previously distributed and will likely do so again once its business reaches maturity.
Despite not paying a dividend, Ryanair's valuation multiples are well-placed. Firstly, I want to point out its PEG ratio of 0.01, which goes to show that Ryanair stock may be a growth at a reasonable price opportunity.
Furthermore, the stock's EV/EBITDA is another interesting topic as it shows relative value to the sector and its own historical average . Assessing EBITDA multiples for depreciation-heavy businesses such as Ryanair is helpful, as companies' depreciation policies can be subjective.
Lastly, the stock's price-to-book ratio of 2.57x deserves attention as it somewhat counteracts my previous optimism, especially because impairments could occur in today's high benchmark interest rate environment. Nevertheless, after netting it all out, one could say that Ryanair is relatively undervalued.
Noteworthy Risks
Balancing out the argument with an overview of a few risks is necessary to avoid any biases.
The first noteworthy risk associated with Ryanair is the waning consumer sentiment mentioned before. Sure, fading sentiment might lead consumers to opt for Ryanair's lower-cost services; however, it is not guaranteed to work out that way.
Furthermore, summer holidays in the Northern Hemisphere have ended, meaning a seasonal anomaly might come into play, contemporaneously lowering Ryanair's KPIs and earnings alike.
Lastly, Ryanair's cyclical attributes are communicated by its value-at-risk figure, which suggests the stock holds much more tail risk than headline U.S. stock indices. Therefore, investors should consider that Ryanair's stock onboards risk to most investment portfolios.
Final Word
Our analysis shows that Ryanair is on a good wicket.
The firm has scaled at a rate of knots since post-Covid reopenings commenced, whereby it has increased its load factor and headline earnings. Redeployment of its earnings in fleet expansion may yield significant benefits in the long term as it provides the firm with the latitude to corner the European low-cost travel market.
Although risks such as fading consumer demand and a seasonal anomaly exist, we believe Ryanair is undervalued and ready to prosper.
Consensus: Strong Buy
For further details see:
Ryanair: Undervalued, Ready To Prosper, And A Strong Buy