Ryanair stock: Hold until the weather clears (NASDAQ: RYAAY)

Sean Gallup

Despite improving traffic, strong recent results and growing financial strength, Ryanair Holdings plc (NASDAQ:NASDAQ: RYAAY, OTCPK:RYAOF) the stock price is down more than 30% in 2022 so far, an average decline of 4.7% each month. It’s not hard to see Why. Weakness in the global economy and stock markets, particularly heading into the winter months when coronavirus infections can spread rapidly, keeps the future of the airline industry in an uncertain place. This justifies delaying any action on the otherwise promising stock with reasonable valuations.

Evolution of the Ryanair share price

Sources: Yahoo Finance, author’s estimates

Rising demand from Ryanair

Recently, the potential for Ryanair stock has manifested itself in improving traffic figures. In August, it carried 16.9 million guests, an increase of 52% compared to the same month last year. This is a big increase but probably expected since some COVID-19 related restrictions were still in place at the time. The real comparison of these numbers is to August 2019, the last pre-COVID-19 holiday month, which it held up well against, with a 13.4% increase. This indicates that demand has outstripped the pandemic and is no longer catching up. The number follows the already improved outlook for traffic from the UK, adding to optimism about its prospects.

Actual and projected guests carried by Ryanair

Guests transported

Source: Ryanair first quarter results presentation

Signs of improvement in Ryanair’s health were already visible in July when its results for the April-June 2022 quarter (Q1, 2022-23) were released. The company reported revenue of 2.6 billion euros, a huge increase of 602% compared to the first quarter of 2021-2022. But as with the latest traffic figures, a sharp uptick was to be expected due to a weak base. However, the comparison with Q1 2019-20 also shows a positive trend, with a 12.6% increase in revenue. This is even more notable against the backdrop of a blow to Easter bookings due to Russia’s invasion of Ukraine earlier in the year and a 4% drop in airfares from in the previous quarter.

Profitable again, but can profits be sustained?

Ryanair also returned to profit, although the number was lower than in the first quarter of 2019-20. Profit should also be taken with a grain of salt as there is no guarantee that the business will continue to remain profitable for the foreseeable future. Ryanair had also posted positive profits in the second quarter of 2021-22 but fell back into the red as Omicron created a new wave of COVID-19 infections again calling for pauses in outdoor activities. The company does not rule out the possibility of another coronavirus outbreak and calls the air transport market “fragile”, indicating that the risk is still widespread.

Consistent with this expressed uncertainty, Ryanair’s earnings outlook can also be seen as bleak. He says: “We have limited visibility in the second half of Q2 and almost zero visibility in H2 when we are generally loss-making.” This further indicates that Ryanair’s profits cannot be taken for granted, nor its revenue growth, for that matter. This is important to note as global unpredictability may have an outsized impact on individual stocks at this time. Keeping this in mind, as with some of my recent articles, the approach here too is to analyze stocks in a macro context. Overall, the earnings numbers indicate that while there is room for optimism if the pandemic situation continues to evolve for the better, the risk of a reversal is still there.

Inflation cushion

The latest figures, however, show encouraging signs of Ryanair’s ability to withstand inflationary pressures. The most obvious indicator here is its return to net profits, as shown above, driven by a larger increase in revenue than costs. Costs increased by 253%, less than half the increase in sales. This is partly due to lower variable costs for heads like airport and handling as well as ownership and maintenance, but also due to the addition of Boeing’s (BA) Gamechanger aircraft to its fleet, which uses 16% less fuel. Even though the company’s fuel needs are 80% covered for the current financial year, this is a significant development in the medium term, as inflation is also expected to remain somewhat high next year.

The company’s operating profit margin, a measure of its ability to pass on rising costs to customers, is 9.2%. This is not significantly lower than that observed in Q1 2019-20 at 11.9%. And, of course, there is a marked improvement over the same quarter last year, given that it was still recording operating losses at the time. This is also to the credit of the company since Ryanair recently underlined that it is the least expensive European airline.

In addition, its gross margin, another measure of increased costs that the company can pass on or, conversely, be able to absorb, is 24.6%. It is still below the pre-pandemic (2019-20) level of 29% and well below the current S&P 500 (SP500) company average of 38%. This is an improvement from the mere 16.5% margin seen for the whole of 2021-22, but it remains to be seen whether this recovery will hold.

Impressive debt reduction

Ryanair’s much improved debt is also a stabilizing force for the company. This is impressive at a time when many other businesses affected by COVID-19 are struggling. In its latest earnings release, the company revealed that its net debt is now reduced to €0.4 billion, which is a considerable reduction in absolute terms compared to the end of the 2021-22 financial year. where it was 1.4 billion euros.

Even more encouraging is the net debt to EBITDA ratio, which fell to 0.9x from around 4x for the prior year. And it’s likely to get even healthier, as evidenced by the remark that Ryanair expects to achieve “an overall zero net debt position over the next 2 years”. This is a particularly good development at a time when interest rates are rising and there is still risk of a setback for the business from COVID-19, as it has plenty of room to grow. borrow in the future if necessary.

Favorable stock market valuations

Ryanair’s market valuations are also generally favourable. As measured by the price-to-sales (P/S) ratio at 2x, Ryanair stock has a slightly lower valuation than the S&P 500 index. However, its forward price-to-earnings (P/E) ratio of around 13x is higher than the S&P airlines index at 9.1x, although the latter is estimated with forward operating profits, which could explain some difference. Moreover, the company has a lot of strengths, which could justify higher relative valuations.

The result

Overall, there are both positives and negatives for Ryanair’s actions. The aviation industry as such is always risky, for reasons outlined by the company itself in its latest earnings release. It’s also hard to ignore that Ryanair’s share price trends are disappointing even from a medium-term perspective, as they have delivered negative returns even over the past five years by a hefty 34%. Ryanair’s share price remained sluggish despite strong traffic growth and the release of positive results.

Still, it’s hard to ignore how well the company has done recently. And not just in terms of traffic growth and positive earnings, but by improving its financial strength, as evidenced by its reduced debt and even relatively moderate cost increases at a time of high inflation and rising interest rates. interest. Its stock market valuations also seem fair. If things continue to improve for airlines, Ryanair may come out on top. However, I think it would be prudent not to buy the stock just yet until at least the winter trends unfold, consistent with Seeking Alpha’s quantitative rating for much of 2022.

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