The stock price of Ryanair Holdings (RYAAY, Financial), the European-based low-cost airline, has experienced a notable surge, increasing by 14% in merely a week, from $87.70 to more than $100, and continue to rise to nearly $110 at the moment. This upward share price movement is backed by the company's strong operational performance in their latest half-year results. Let's have a closer look into Ryanair operation to see whether the current stock price is reflective of underlying business improvements and sustainable growth prospects.
Strong first half 2024 operating performance
Ryanair saw a lot of growth in the first half of 2024. The airline's revenue went up by about 30%, from €6.62 billion the year before to €8.58 billion. More passengers flew Ryanair - 105.4 million, up 11% from the previous year. Flights were nearly full, with an impressive 95% load factor. As one of the biggest low-cost airlines in the world, Ryanair has managed the cost increase efficiently. Even though operating costs were up 24%, including higher fuel prices, staff costs, and airport fees, the growth in revenue was much bigger than the rise in costs. That translated into higher profits - operating profit, net income, and earnings per share (EPS) all went up. Operating profit increased by 47% to nearly €2.42 billion. Net profit jumped 59%, from €1.37 billion to €2.18 billion. EPS shot up 72%, reaching €1.91.
Source: Ryanair's presentation
Prudent fuel hedging strategy
Fuel is the biggest cost for airlines. Thus, keeping fuel prices steady is really important for any airline, including Ryanair. To keep prices stable, airlines often use fuel hedging techniques. One way is buying fuel futures - contracts to purchase fuel at a fixed price to be delivered later. This lets airlines lock in fuel costs for a certain period. Ryanair uses these fuel futures to hedge against rising fuel expenses. Ryanair has hedge as much as 83% of the fuel requirement for 2024 at around $89 per barrel and 53% fuel requirement for 2025 at around $79 per barrel. The different between the current FY25 and the FY24 hedged rate would deliver roughly €300 million savings for the airline.
Source: Ryanair's presentation
Lowest cost among low-cost airlines
To fairly evaluate the cost efficiency of airlines, it's crucial to remove fuel costs from the equation. Ryanair stands out in this regard, consistently achieving the lowest cost per passenger compared to other low-cost airlines such as Wizz Air (WIZZ), easyJet (EZJ), and Southwest Airlines (LUV). Specifically, Ryanair's cost per passenger is only €31, which is a mere 66% of Wizz Air's €47, and significantly less than easyJet's €76 and Southwest Airlines' €126, which is four times that of Ryanair's. This trend of cost leadership isn't new for Ryanair; it has maintained this competitive edge since before the COVID-19 pandemic. The disparity in cost per passenger has only grown in the post-pandemic period, highlighting Ryanair's superior cost efficiency even more.
Source: Ryanair's presentation
Fortress balance sheet with shareholders' rewards commitment
The common investor assumption that an airline's extensive fleet correlates with high leverage is challenged by Ryanair's financials. Despite owning a significant majority of its planes, Ryanair possesses a solid balance sheet and a conservatively structured capital, distinguishing it from its peers. As of September 2023, Ryanair reported a healthy €3.625 billion in cash and cash equivalents and an impressive €8.43 billion in shareholder equity, contrasted with a modest debt profile—€2.58 billion in long-term obligations, €35.3 million in current debt maturities, and €147 million in other non-current liabilities, totaling €2.76 billion in debt. This financial structure allows Ryanair to boast a net cash position of €865 million, underscoring its liquidity and capacity to withstand financial stress. Its debt-to-capital ratio stays at a low 24.9%. In 2023, the airline generated €2.28 billion in EBITDA. Accordingly, its EBITDA/debt ratio is only 0.83x, highlighting Ryanair's ability to manage its cash flow effectively in relation to its debt.
Ryanair's track record of enhancing shareholder value is impressive and steady. Between 2008 and 2020, the airline has returned €6.74 billion to its shareholders through dividends and share buybacks. In 2024, it continued this trend by announcing a €400 million dividend, equating to €0.35 per share. Looking to the future, starting from 2025, Ryanair plans to implement a new dividend policy aimed at distributing approximately 25% of the previous year's net profit back to its shareholders. This strategy underscores Ryanair's commitment to return money to shareholders.
Ryanair is still undervalued
Before the COVID-19 pandemic, Ryanair was consistently held in high regard by the market, reflected in its earnings multiple which invariably stood in double digits, varying between 11.33x and 17.57x. Looking ahead to the full year of 2024, Ryanair anticipates its after-tax profits to fall between €1.85 billion and €2.05 billion. Working with a reasonable estimate that Ryanair achieves €1.9 billion in profits for the full year 2024 and applying an average price-to-earnings (P/E) ratio of 15x, the airline's valuation would be projected at around €28.5 billion. This valuation suggests a significant 42.5% increase from its current market price, indicating that Ryanair is undervalued at the moment.
Key takeaway
Ryanair delivered robust growth in the first half of 2024, with revenue, passenger volume, load factor, and profitability metrics all trending upwards. Prudent fuel hedging and an industry-leading cost structure further cement Ryanair's competitive positioning. The airline has a fortress balance sheet marked by strong cash flows and low leverage compared to peers. Valuations remain attractive, with the estimates suggesting 42.5% upside based on a 15x P/E multiple. On an operational, financial, and capital returns basis, Ryanair appears well-positioned to generate further value. Specifically, the company's commitment to substantial dividends makes it an especially compelling investment for income-oriented investors. Ryanair's confluence of strengths points to an airline stock worth serious consideration.
