By now, everyone is aware of the drama that has been going on inside Boeing (NYSE: BA) in regard to its incident during an Alaska Air Group (NYSE: ALK) flight, where a 737 MAX 9 jet suddenly saw its door pop off in the middle of the air. Much blame has been pushed between manufacturers like Spirit AeroSystems (NYSE: SPR) and the airlines themselves.
Trying to make sense of this whole situation can be a treacherous task for your portfolio, as you are likely to get caught up in the whipsaws brought on by uncertainty and quickly changing sentiment around the transportation industry, particularly airlines. So, how can you ensure you step away from all this and find yourself a drama-free stock?
The market has the answer; though it is encrypted in its own language right now, your task today will be to translate it into a comprehensive strategy for your investment dollars. For reasons that will become clear in just a bit, Ryanair (NASDAQ: RYAAY) can be one of the best places to start looking into, especially after American counterparts have cleared the way.
Where is the cycle?
As is the custom of the big Wall Street names, getting the odds in your favor calls for understanding more of the bigger picture so that you know where and why money will shift, enabling you to ride the wave. Considering that airline earnings depend primarily on consumer spending trends, here’s what can happen.
According to analysts at The Goldman Sachs Group (NYSE: GS), within their 2024 macro outlook report, the manufacturing sector in the United States is expected to experience a breakout in activity and profits. Now, one important piece to the puzzle makes them say this, and it’s coming from the FED.
It is now expected and probably priced into the markets already – judging by the new all-time highs -that the FED will begin to cut interest rates this year in a sudden shift to their rate hike policy applied during most of 2023. Since interest rates drive the value of currencies, lower rates could cause the dollar to decline this year.
Without getting in the weeds of what this means, the European Central Bank is taking the opposite stance toward their rate policy, stating that they will not be cutting rates this year. A strong Euro versus a weakening dollar will likely cause a lot of traveling in that part of the world, one far away from the Boeing drama.
So, even after American names like United Airlines (NYSE: UAL) reported a stellar earnings outlook, sending the stock up by as much as 14.6% in the days following the announcement, the market is still not buying the dip in airlines on this side of the world.
It may be the currency expectations, interest rates, or even the price of oil driving markets to pick Ryanair as their new favorite name. At the end of the day, who knows? The one thing that any veteran trader will tell you is that you should never fight the market.
Don’t fight the market
Spreading the airline industry as a prime for comparison, there are two particular pillars you need to take into consideration to translate what the market is telling traders and investors today.
First, the forward price-to-earnings ratio is key here, as it is the market’s way to place a value today on tomorrow’s expected earnings. For this one, it makes sense that the market is willing to pay a higher multiple on stocks that it hopes will report growing earnings in the coming months.
So, where does Ryanair stand on this list? Well, it’s forward P/E of 12.1x, which not only represents a premium of 94.1% to the industry’s average 6.2x valuation multiple. Alright, you’re getting somewhere here; stronger Euro = more domestic travel for Ryanair to take earnings from.
Comparing this valuation to United Airlines, that stock trades at 4.4x forward P/E, a 28.8% discount to the industry average. Now, there must be a reason why it’s trading so cheap, right? A weaker dollar could weaken consumer sentiment and lower the probability of leisure spending. Good job, Goldman.
Wall Street analysts are on the same page here, and remember, they make their living by analyzing flight and consumer trends to come up with their earnings projections, so it is sometimes worth it to see what they are expecting.
Ryanair analysts see an earnings per share jump of 22.4% in the next twelve months. United Airlines analysts expect only 16.7% growth. It is likely that, as Ryanair reports its own set of quarterly earnings this week, these EPS projections could be pushed even higher to justify the 94.1% premium the stock commands.
