Shares in Ryanair Holdings (LSE: RYA) gained more than 2% this morning after the Irish budget carrier unveiled an €800m share buyback and confirmed full-year profit forecasts.
Investors weren’t discouraged by news that Ryanair’s third-quarter profits — which it announced today — were below expectations. The airline reported third quarter net profit of €103m, missing analysts’ expectations for a profit of €118m.
Bookings were softer in the aftermath of the Paris and Brussels terrorist attacks, according to Ryanair. To stimulate demand, Ryanair cut prices. The airline’s average ticket price fell by 1% to €40 during the fourth quarter, according to today’s figures, but passenger numbers did rise.
Indeed, Ryanair revised its full-year passenger forecasts upwards today, from 105m to 106m. That’s 17% more than last year. Lower fuel costs have helped boost profit margins too. Ryanair’s net margin has risen from 4% to 8% over the last year.
Is there more to come?
Ryanair, like easyJet (LSE: EZJ), has had a very good run over the last few years. Since February 2012, shares in both airlines have risen by more than 200%.
Sales and profits have risen steadily, while profit margins have also improved. Despite this track record, shares in easyJet are down 10% so far this year, while Ryanair has fallen by 6.5%. Are these stocks now fully valued?
Analysts expect easyJet to generate earnings per share (EPS) growth of 14% in 2016/17. For Ryanair, EPS growth of 18% is expected in 2016/17.
These forecasts put Ryanair on a 2016/17 forecast P/E of 12.7 with a maiden forecast dividend yield of 0.75%. easyJet looks cheaper, with an equivalent P/E of 9 and a prospective yield of 4.6%.
However, I’m wary of investing in either company after such a long run of growth. The airline industry has a long history of boom and bust. Having doubled in value, Ryanair and easyJet are now quite large companies, with market values of £13bn and £6bn respectively. Maintaining the growth rate seen in recent years could become difficult.
Growth investors may want to keep holding, but I think Ryanair and easyJet are starting to look quite fully valued.
Buy Rolls-Royce for recovery?
Rolls-Royce Holding (LSE: RR) is heavily exposed to the airline industry, through its aero engine business. Shares in Rolls have fallen by nearly 40% over the last year, after a succession of profit warnings.
However, the group announced a $2.7bn contract with budget carrier Norwegian Air today. Rolls will provide Trent 1000 engines for 19 new Boeing 787 aircraft, along with TotalCare servicing and support.
Is this a sign that trading may be starting to improve in the Rolls aero division?
I’m not so sure. The firm’s stock hasn’t moved following today’s news, which was described as a “long-term” deal. This suggests to me that the profits from this deal will be spread over a number of years, and may not be all that significant.
There’s also no evidence yet of a wider turnaround in the Rolls business, which is heavily exposed to the oil and gas sector. Earnings per share are expected to fall by almost 50% in 2016, leaving the shares looking pricey on 20 times 2016 forecast earnings.
In my view, there’s no rush to buy until we see some evidence that the Rolls turnaround is delivering results.