Ryanair (LSE: RYA) has a habit of being in the news for the wrong reasons. In recent months, it’s been the subject of industrial action over employee disputes and then, at the weekend, the airline came under fire for not removing a racially-abusive passenger from a flight.
The latest woe comes in the shape of a 7% fall in first-half profits, which the company put down to a number of issues, in addition to staff strikes. Air Traffic Control (ATC) disruptions were partly to blame, although average fares fell by 3% due to excess capacity in Europe.
Although agreements have now been signed with unions in the UK, Ireland, Italy, Portugal and Germany, problems with ATC, passenger demand, fuel costs and the like are an expected part of running an airline — and investors have to expect such cyclical occurrences.
Although Ryanair shares are up around 75% over the past five years, they’re well down since their 2017 peak, having lost 35% in a little more than a year.
With earnings expected to fall in the year to March 2019, we’re still looking at a forward P/E of approximately 14, though that would drop to 13 on predictions of an EPS recovery by March 2020.
By contrast, easyJet (LSE: EZJ) shares are trading on forward P/E multiples of only around nine — and easyJet is paying decent dividends. We’ve seen a couple of years of big earnings drops, mind, and that led to a cut in last year’s yield to 3.4%.
But forecasts suggest a rebound in both earnings and dividends this year, with analysts predicting a yield of 5%. That suggests to me that easyJet shares, which have significantly lagged the Ryanair price over the past five years, are the ones that, on paper at least, are looking the more oversold and the bigger bargain.
And it hints that investors might be waiting to see proof of an earnings turnaround before they plonk down their cash.
Back to growth?
September’s full-year update spoke of “a strong performance in the fourth quarter with robust customer demand driving outperformance in both our passenger and ancillary revenue growth, and strong profitability,” and indicated headline pre-tax profit of between £570m and £580m.
While I typically steer clear of the airline industry due to so many factors being totally outside an airline’s control, I can’t help seeing easyJet shares as having a decent safety margin now. And unless the results are seriously out of line with expectations, I could see the share price starting to pick up again.
As for Ryanair and its higher valuation, whether that is justified will surely depend on the airline’s continued growth potential. The firm has taken delivery of 23 new B737s in the first half (to take its fleet to 450) and has added more than 100 new S.18 routes.
And though the company has slightly reduced its winter capacity, it’s predicting a full-year traffic rise to 141m.
Higher fuel prices and the continuing squeeze on the airline industry could well lead to more casualties, with Primera Air having ceased trading in early October. So easyJet and Ryanair could be seeing some reduced competition — it’s during hard times that the best in business show their strength.
But the airline business is still one I won’t buy.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.
Alan Oscroft 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.