Third-quarter results released this morning by growth star Ryanair (LSE: RYA) showed Europe’s leading budget airline continues to perform well. Even against a challenging backdrop, revenue rose 4% and net profits lifted over 12% for the period.
Yet despite rising revenue and significant margin improvements, Ryanair doesn’t appear to me to be an attractive investment right now, given the sector-wide headwinds it’s facing.
Most worrying is the rate at which Ryanair and competitors are adding capacity to the market at the same time as demand growth from consumers begins to slow. While the likes of easyJet have said they believe the recent bankruptcies of several European carriers will allow them to raise prices, Ryanair’s management warned this morning that “we do not share the optimism of competitors and market commentators for summer 2018 fare rises.”
This warning comes as management expects fiscal year 2018 fares to fall by around 3% year-on-year. Further weakness into the key summer trading months of fiscal year 2019 could send this number edging even lower. While adding capacity is so far compensating for reduced fares, it does leave airlines vulnerable to any shock to the system, which could see their profits drop dramatically given the high fixed costs running an airline entails.
While Ryanair remains the leanest operator in its industry, investors would do well to exercise caution when management makes a statement such as this one it left this morning regarding fiscal year 2019: “We would, even at this early date, urge extreme caution on investor & analyst assumptions for fares in FY19.”
A long road (or tunnel) ahead
Another market darling of recent years that has lost its lustre in my eyes is prospective miner Sirius Minerals (LSE: SXX). The would-be Yorkshire miner has made significant progress in recent years, winning approval for its mine, raising $1.2bn in initial equity and debt funding, and beginning actual construction.
However, for a £1.2bn market-cap, there remain too many important but unanswered questions for me to be comfortable holding its stock. One of those is the further $1.8bn in debt funding the company needs to raise for construction of the project’s first phase. Recently-signed off-take agreements will help management secure this critical funding, but until it’s actually in place, it remains a looming issue.
Then there’s polyhalite, the group’s target output. Sirius’s management says that this fertiliser is superior to its more common cousin potash and will eventually earn a premium price. Unfortunately for now, investors can only trust management’s view as the mineral isn’t used as a fertiliser on any great scale, which means no premium for now.
To round things off, there’s the actual digging of the mine and completion of the 23-mile tunnel that needs to be completed to reach the 2021 first production target. This is a hugely ambitious project and investors shouldn’t forget that delivering multi-billion pound, years-long projects on time and on budget is incredibly rare. Indeed, the group’s latest quarterly update disclosed that diaphragm walling is already two months’ behind schedule.
And although management says it can recoup this lost time, putting all these issues together makes Sirius Minerals far too risky for my taste.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.