Over the years I have listened to hundreds of presentations given by chief executives but I have to say that for pure entertainment value a presentation given by Michael O’Leary last Thursday has to be the best. I had heard him a few years ago in a smaller group setting but last Thursday he entertained a couple of hundred people. In addition to the entertainment he actually has a great business story to tell. The outline of this business story is available for everyone to see and hear on the Ryanair website in the “about us” section but it does no justice to the performance he gave last week.

As much as I would love to concentrate on the entertainment aspect of his speech, I am going to concentrate on the business story as this will probably contribute a lot more to our financial well being.

In true Michael O’Leary style he told us that the Ryanair story is an incredibly simple story and as much as I hate to admit it I think that he might be correct. To back up his claim that the story is a simple one he showed us the following chart:

Ryanair - Fleet Growth to 2012

The chart shows just how rapidly Ryanairs capacity will grow in the next few years. By 2010 the fleet will have doubled relative to 2006 and if they exercise the options they have to buy aircraft from Boeing they could triple the fleet by 2012. Michael O’Leary pointed out that they managed to buy these aircraft cheaply because they ordered them in the aftermath of the 9/11 attack on the twin towers. This gives Ryanair a dramatic competitive advantage. He believes that they will find the bases and the routes to successfully deploy these aircraft and if he is right well then the Ryanair story is indeed a great growth story.

 I have been trying to think of the most likely weakness in his case. Could it be:

  • The market is already saturated? Maybe there just aren’t enough routes or bases to take all those aircraft?
  • Oil prices rise to the point where even Ryanair prices will be too expensive for the leisure traveller?
  • Or the EU put a punitive tax on air travel?
  • An accident? Terrorism?
  • Acquisitions: Could he bite off more than he can chew? If he had succeeded in buying Aer Lingus would he have got lost in Union disputes?
  • Technology problems: With 99% of bookings now on the internet if the Ryanair website ever crashed it could result in serious customer damage?

These are a few of the things that could go wrong but having seen their performance over the last few years my gut instinct tells me that none of these things will be of such scale to destroy the positive story. If there is an act of terrorism of such a magnitude that people stop flying well then the whole stock market is vulnerable not just Ryanair.

I think that on the balance of probability Ryanair will see significant growth over the next few years but is that already the consensus? Is it already in the share price? This is where the whole problem of valuation crops up.

Ryanair (EUR)

We already have the first three quarters of the 2007 estimates above so I think we can be quite comfortable saying that Ryanair is trading on 24x historic earnings and 17x historic cash earnings. This is expensive for an airline but then again Ryanair isn’t just any old airline.

If the estimates are in any way accurate the valuation should fall reasonably rapidly. But is this enough?

 In my January opinion piece I talked about my reluctance to buy shares with expensive valuations. I said that I was unlikely to ever buy a Google. I would love if Ryanair had a lower valuation because then I could say with an awful lot of conviction that I believe that it is a buy. At its current valuation I think I can say that Ryanair will outperform cash deposits but whether it will outperform the overall market is a more difficult question.

So if you want a share that will give you a return greater than just leaving your cash on deposit I think that you can buy Ryanair. If you want to outperform the overall stock market you may need to look for a cheaper entry point.

I just hope that I never come to the conclusion Ryanair is a sell because I can just imagine what Michael O’Leary would say! (Anyone that has listened to last quarters earnings conference call may have a flavour of what I mean because he specifically comments on certain analysts that had a sell recommendation on them)

I must finish now because I need to book my next holiday… where is it that Aer Lingus fly to……

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Directors: Kenneth Power (Managing) B.Comm, MBS, ASIP, Regular Member of the CFA Institute.
Siobhan Power