At the start of 2017 I singled out two low-cost airlines that I felt were being undervalued by the market and trading on very attractive valuations. Now six months on, how have these budget carriers fared? And perhaps more importantly, are they still worth buying?
Brexit-induced collapse
The first of my start-of-year airline picks was Ryanair (LSE: RYA). Like many firms in the travel sector the Dublin-based carrier had suffered a Brexit-induced collapse, with the shares losing a quarter of their value in the two trading days immediately following the shock referendum result.
Bargain hunters duly stepped in and began buying the heavily discounted shares, eventually propelling them to record highs by April of this year. This positive momentum has continued throughout 2017, with the share price now 60% higher than a year ago.
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Defying gravity
Some shareholders may be starting to wonder whether it’s time to bail out. But I wouldn’t be too hasty. Ryanair’s shares continue to defy gravity as revenues and profits soar ever higher with each passing year. Clearly the company is doing something right. There may have been many controversies over the years, but by now Ryanair’s customers know exactly what to expect – a no-frills travel experience for an ultra-low fare.
In fact, it could be argued that it consistently under-promises and over-delivers, unlike premium brand flag carriers who may leave customers disappointed when their economy class flight doesn’t match up to the business class TV ads.
Long-term appeal
Today’s Q1 results showed that Ryanair can continue to deliver strong growth, reporting a 55% rise in profits to €397 for the three months to the end of June, compared to €256m for the same period a year earlier. Revenue figures also came in higher at €1.9bn, a 13% improvement on 2016, as the number of passengers carried grew by 12% to 35m.
The airline did, however, caution that there could be major challenges ahead for all airlines if the UK was to leave the EU Open Skies agreement as a result of the Brexit negotiations. Nevertheless, I believe Ryanair’s low-cost operating model and strong balance sheet still hold appeal for long-term investors. The valuation is not too demanding either, with a forward P/E ratio of 14.6 dropping to just 12.9 for FY2019.
Low cost base
Another budget airline whose share price has taken off in recent months is Wizz Air (LSE: WIZZ). The no-frills carrier last week reported a strong start to 2017 with first quarter net profits soaring to a record €58m, a year-on-year increase of 50.4%. Total revenues also showed strong improvement, rising 29% to €469.3m, with the total number of passengers carried rising from 5.8m to 7.2m.
Wizz Air’s ultra-low-cost base allows it to offer the lowest fares, which in turn helps to stimulate the market for air travel in Central and Eastern Europe. As economic growth in the region continues to push ahead of Western Europe, ever more customers take the opportunity to fly with the airline.
The share price may have soared in recent months, but with double-digit earnings growth anticipated for the next two years, the shares are still attractive for growth hunters, with the P/E rating falling to just 12 for FY2019.
