Surprised Ryanair rockets after cracking summer

Ryanair's upgrade cycle is in full swing and, as we reported over the summer, another hike in expectations was very much on the cards. Well, the budget airline has duly delivered and now estimates it will make an extra £250 million of profit this year, 25% more than previously thought and 40% better than last year. This kind of performance is why Ryanair shares deserve their premium rating, but with the price up as much as 10% Wednesday at record highs, and with obvious headwinds, the temptation to take some profits off the table is palpable.

After a cracking summer - July and August numbers were strong - September is going well, too, which has forced Ryanair to bring this update forward by two weeks. And whisking passengers around Europe will now generate net profit of between €1.175 billion and €1.225 billion in the year to March, it says, up from the old estimate of €940-€970 million.

A decision to soften its terrible image through the "Always Getting Better" customer experience programme has clearly been a huge success. Ryanair has also been able to charge slightly higher than expected fares - up 2% versus previous guidance for no change. Traffic grew by 13% in the first half versus the 10% baked into forecasts, third-quarter traffic is tipped to rise by 15% and quarterly fares will remain flat rather than fall as much as 8%.

Ryanair also now reckons it will carry 104 million passengers over the 12 months, one million more than last thought and up over 13 million on last year. And industry trends have worked in its favour - bad weather in Northern Europe, stronger sterling encouraging more UK families to holiday in the Med, and flat capacity across the EU. The slump in oil prices mean it's also paid less than expected for the unhedged portion of its fuel intake, put at about 10% of volume.

(click to enlarge)

Boss Michael O'Leary admitted he had been surprised by summer bookings, but urged caution ahead of the typically quieter winter period. Only 30% of third-quarter bookings have currently been sold and there's zero visibility for the final quarter. There'll still be downward pressure on fares and yields this winter as Ryanair grows in major EU markets like Germany, just as rivals begin to benefit from lower oil prices as historic hedges unwind, said the Irishman.

He added: "Being the airline industry we do not expect these favourable conditions will persist, and we would urge shareholders and analysts to avoid irrational exuberance while we continue to execute our very ambitious growth plans during what we expect to be very attritional and sustained fare wars across Europe this winter".

Gert Zonneveld at Panmure Gordon seems to have taken the hint. He's called the rally right, having tipped Ryanair shares as a 'buy' with price target upgraded to €14. Now, at €13.81, they trade on almost 19 times forward earnings, dropping below 16 times for the year after. That compares with easyJet on a multiple of less than 12 times for the year to 30 September 2016, although forecast double-digit earnings growth is still shy of expectations for Ryanair.

"The strong earnings momentum, whether in a high or low fuel price environment, combined with a defendable cost advantage, long term growth prospects, attractive returns and strong cash generation, in our view justifies an enhanced valuation," said Zonneveld before today's share price rally. "We maintain our Buy recommendation."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.