Shares in Ryanair Holdings (LSE: RYA) gained more than 2% this morning after the Irish budget carrier unveiled an 800m share buyback and confirmed full-year profit forecasts.
Investors werent discouraged by news that Ryanairs third-quarter profits which it announced today were below expectations. The airline reported third quarter net profit of 103m, missing analysts expectations for a profit of 118m.
Bookings were softer in the aftermath of the Paris and Brussels terrorist attacks, according to Ryanair. To stimulate demand, Ryanair cut prices. The airlines average ticket price fell by 1% to 40 during the fourth quarter, according to todays figures, but passenger numbers did rise.
Indeed, Ryanair revised its full-year passenger forecasts upwards today, from 105m to 106m. Thats 17% more than last year. Lower fuel costs have helped boost profit margins too. Ryanairs net margin has risen from 4% to 8% over the last year.
Is there more to come?
Ryanair, like easyJet (LSE: EZJ), has had a very good run over the last few years. Since February 2012, shares in both airlines have risen by more than 200%.
Sales and profits have risen steadily, while profit margins have also improved. Despite this track record, shares in easyJet are down 10% so far this year, while Ryanair has fallen by 6.5%. Are these stocks now fully valued?
Analysts expect easyJet to generate earnings per share (EPS) growth of 14% in 2016/17. For Ryanair, EPS growth of 18% is expected in 2016/17.
These forecasts put Ryanair on a 2016/17 forecast P/E of 12.7 with a maiden forecast dividend yield of 0.75%. easyJet looks cheaper, with an equivalent P/E of 9 and a prospective yield of 4.6%.
However, Im wary of investing in either company after such a long run of growth. The airline industry has a long history of boom and bust. Having doubled in value, Ryanair and easyJet are now quite large companies, with market values of 13bn and 6bn respectively. Maintaining the growth rate seen in recent years could become difficult.
Growth investors may want to keep holding, but I think Ryanair and easyJet are starting to look quite fully valued.
Buy Rolls-Royce for recovery?
Rolls-Royce Holding (LSE: RR) is heavily exposed to the airline industry, through its aero engine business. Shares in Rolls have fallen by nearly 40% over the last year, after a succession of profit warnings.
However, the group announced a $2.7bn contract with budget carrier Norwegian Air today. Rolls will provide Trent 1000 engines for 19 new Boeing 787 aircraft, along with TotalCare servicing and support.
Is this a sign that trading may be starting to improve in the Rolls aero division?
Im not so sure. The firms stock hasnt moved following todays news, which was described as a long-term deal. This suggests to me that the profits from this deal will be spread over a number of years, and may not be all that significant.
Theres also no evidence yet of a wider turnaround in the Rolls business, which is heavily exposed to the oil and gas sector. Earnings per share are expected to fall by almost 50% in 2016, leaving the shares looking pricey on 20 times 2016 forecast earnings.
In my view, theres no rush to buy until we see some evidence that the Rolls turnaround is delivering results.
Ultimately, I don’t think that easyJet, Ryanair or Rolls-Royce can double in value again over the next few years.
If you’re looking for this kind of growth plus a decent dividend yield, then you need to look elsewhere.
One possibility is this company, which the Motley Fool’s top share experts believe could triple in size in coming years.
The company concerned is a UK business with global ambitions.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.