Ryanair weathering storm

Investor: An insider's guide to the market: There is as yet little sign of any reduction in current high levels of volatility across equity markets, and this unsettled period of trading could last through the summer months.

With many equity market indices now approximately 10 per cent below their 2006 year highs, Investor takes the view that further sharp falls in share prices are unlikely.

On the other hand, this market correction has undoubtedly dented investor confidence to a degree that suggests an early and sustained rebound in share prices is also unlikely.

The positive factors that underpinned earlier bullish sentiment broadly remain in place. Economic growth is strong and companies are generally in rude financial health. Corporate profits are growing strongly and balance sheets are healthy. Although there are some warranted concerns regarding inflationary pressures, there is as yet no evidence that high commodity prices are being transmitted across the economy.

The key negative influence continues to be uncertainty concerning short-term interest rates. Some analysts had expected the tightening cycle in the US to pause at the current rate of 5 per cent for Fed funds. However, further rises to possibly 5.5 per cent over the summer months seem to be in prospect. The European Central Bank is predicted to raise euro short-term interest rates beyond the current 2.75 per cent.

The current market environment therefore may be characterised as one where there is a standoff between the bulls and the bears, with stalemate being the most likely outcome over the summer months.

The Iseq Overall Index is now trading around the level that it opened in January. Stocks that have substantially outperformed the overall market include Elan, Kingspan and C&C. The respective share prices of each of these companies has risen by approximately one quarter so far this year.

Good news regarding the relaunch of Tysabri has given further impetus to the recovery in the Elan share price.

The successful rollout of the Magners cider brand in Britain has driven the C&C share price, while Kingspan continues to benefit from its market-leading position in several fast-growing building products sub-sectors.

Underperforming shares include Anglo Irish Bank, Kerry Group and Independent News & Media, with year-to-date share price declines of the order of 10 per cent.

One of the worst performers is Fyffes, which has suffered badly from the collapse in banana prices due to the liberalisation of the European banana market.

Ryanair is another stock that has underperformed so far in 2006 and is now down by approximately 15 per cent. The relentless climb in fuel prices is the main reason for this underperformance.

In the year to end March 2006 Ryanair's fuel bill rose by more than 70 per cent, which absorbed much of the extra revenue generated through ongoing rapid growth in passenger numbers and total revenues. The rate of growth in passenger numbers and total revenues shows no signs of slowing from annualised growth of over 20 per cent. Therefore, if fuel prices were to decline or even stabilise, profit growth at Ryanair would accelerate quite sharply.

The resilience of Ryanair's business model was demonstrated by its recently announced full-year results for the year to end March 2006. Despite the headwind of higher jet fuel prices, profits grew by 11 per cent. For this year (through March 2007) most brokers are forecasting slightly slower earnings growth of around 8 per cent. Not surprisingly there are differing views regarding 2007/08 with earnings growth forecasts in the 8-15 per cent range.

Ryanair's share price has performed very well through the recent phase of market turbulence and has risen by approximately 6 per cent over the past month. This suggests that investors are beginning to refocus on Ryanair's long-term strengths as the lowest cost operator in an aviation market with plenty of untapped growth potential.

This year the airline expects to take delivery of 30 new aircraft, enabling it to continue to open new routes. Unit costs, excluding fuel, are targeted to decline by a further 3-4 per cent this year, solidifying Ryanair's enviable cost competitiveness.

Based on earnings forecasts for the current financial year, the shares are trading on a price earnings ratio of approximately 15.5. This is lower than its historical average and lower than comparable US low-cost carriers.

Investor takes the view that Ryanair's favourable medium-term prospects will come increasingly to the fore, thus resulting in further share price gains in a generally flat overall equity market in coming months.