Ryanair looks pricey

Taking a trip on a Ryanair airplane has only one attraction - it's cheap. But judging by the extraordinary reaction in the market to the placing of some of the Ryanair shares held by the Ryan family, Michael O'Leary and David Bonderman's Irish Air, the shares have plenty of attractions to investors. The only question is whether Ryanair shares - now trading at €9.50 - are getting a bit pricey.

Ryanair is most commonly compared with Southwestern Airlines, the no-frills American carrier that was the very model for Ryanair's own low-cost, low-on-comfort service. Indeed Southwestern is held up by analysts as the airline every other no-frills operator should aspire to become. Why then are Ryanair shares now trading on a substantial premium to Southwestern?

At €9.50, Ryanair shares are trading on a prospective price/earnings multiple of more than 24 based on 38.9 cents earnings forecast from the airline's own broker, Davy. In contrast, Southwestern - with a price of just more than $311/2 - is trading on a forward p/e of just 21. That's a 12 per cent premium for Ryanair over the supposed blue-chip of the no-frills airline business.

Now there is absolutely no doubt that Ryanair deserves to command a premium rating on the market, given its impressive profits growth and the likelihood of continuing growth in the years ahead as its network of routes expands. The phenomenal response to the placing of the shares last week is indication enough of how those growth prospects are viewed in the market.

But there are still some factors that are artificially boosting the Ryanair share, particularly the fact that despite last week's share sale, more than 30 per cent of the shares are still held in the Ryan-O'Leary-Bonderman bloc.

The €8.38 price fetched for the shares in the placing last week was an outstanding one, but despite getting only a small portion of the stock they bid for, one must question the logic of frustrated investors chasing the price upwards in an effort to get more stock. At a p/e of 21, Ryanair's was highly valued - and fairly so. At a p/e of 24, the share has gone ahead too far.