Why Ryanair Holdings plc (ADR) (RYAAY) Is One of the Best Stocks to Buy for 2018
Ryanair Holdings plc (ADR) (Nasdaq: RYAAY) isn't your "typical" stock. It's a European airline -- that is, it operates in a highly regulated environment and investors have to worry about currency fluctuations. But a share is a share, a spade is a spade, and, European or not, RYAAY is one of U.S. News' best stocks to buy for 2018.
Here's a brief look at Ryanair's compelling business, its competitive advantages, and other factors that make RYAAY stock a great name to buy for the year ahead.
About Ryanair. Founded in Ireland in 1985, Ryanair has grown to become Europe's largest budget airline. It's the flavor of choice for cash-strapped travelers jetsetting around Europe. The reason? Since flights are a commodity -- customers can choose any airline to get from point A to B -- Ryanair's biggest advantage stems from one area and one area alone: Price.
Ryanair is almost always cheaper than the competition. It's that simple.
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Like Amazon.com ( AMZN) and its CEO Jeff Bezos, Ryanair and its CEO, Michael O'Leary have made a habit of crushing the competition by focusing on the customer. For Bezos, he thinks of progress as anything that makes the customer experience better, delivery quicker, or the price lower. For O'Leary, he sees progress as much more one-dimensional: It's all about the lowest price.
O'Leary has piloted Ryanair since 1994, and his years of focus have paid off: the airline enjoys dramatically lower costs than its rivals, which obviously gives it an extreme advantage over the competition -- an advantage so powerful that it makes RYAAY one of the best stocks to buy for 2018.
Ryanair is growing, pushing rivals out. In some ways, Ryanair's strength is actually hard to believe. For example, in 2017, three rival budget airlines collapsed: Air Berlin, Alitalia and Monarch. What did RYAAY do that same year? Post all-time-high profits.
With the death of three rivals, Ryanair's market share and pricing power can grow even larger.
It's already grown by leaps and bounds in the last five years. In fiscal 2013, the company boasted 79.3 million passengers; in 2017, the airline ferried 129 million people.
But, RYAAY stock's biggest strength is extremely low fares, which the company is able to afford due to its industry-low cost structure.
But how does Ryanair achieve this low cost structure, and is it sustainable? That's what investors should rightly concern themselves with.
Origin of cost advantages. Unlike many other airlines, Ryanair operates only one airplane model: the Boeing ( BA) 737-800. This allows the company to limit costs related to employee training, maintenance, and parts and parts storage. It also gives Ryanair more flexibility than competitors when it comes to scheduling crews for flights.
Personnel-wise, Ryanair enjoys further cost advantages from a staffing strategy that could be called Uber-esque. Pilots only get paid for the number of hours or sectors they fly, and the company only recently said it would start recognizing pilot unions. Stewardesses are strongly financially incentivized to sell products to customers in-flight.
And when it comes to ticketing and customer service, RYAAY is again a study in stretching the dollar (or euro, as one would have it). The company often outsources these services to cheaper third-parties.
Vitally, the vast majority of customers -- 94 percent -- book directly on Ryanair's website or app. This does wonders for customer acquisition costs and is a remarkable testament to the company's brand name and prioritization of a seamless, closed-end customer experience.
RYAAY stock is only attractive because the company can make bundles of money at price points that would have competitors selling at a loss.
Another clever way Ryanair keeps its costs low stems from its aggressive approach toward airport and gate selection, as well as baggage and handling costs.
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It chooses the cheapest airports -- often using secondary or regional airports -- and the cheapest gates at those airports. As Ryanair has grown into Europe's biggest airline by passengers, it's gained leverage in negotiating those rates. In a bid to continue its high-growth bonanza, the company is starting to extend to mainstream airports, but its miserly ways are in its corporate DNA: it often uses less-espensive outdoor boarding stairs to load and unload passengers.
RYAAY stock has something for all investors to like. Ryanair shares are eerily similar to its plane tickets: They're attractive mostly because they're cheap. The stock trades at 15 times earnings and 13 times forward earnings -- deep discounts to the Standard & Poor's 500 index, which trades at 22 times earnings and 19 times forward earnings.
And while growth investors may be attracted by its success, Ryanair's size will slow growth somewhat going forward. Still, shares are resilient, and RYAAY stock gained 25 percent in 2017 despite a holiday scheduling issue that caused more than 20,000 flight cancellations affecting hundreds of thousands of passengers.
Share buybacks are always a possibility going forward as well; last year the company announced a 600 million-euro (roughly $717 million) share repurchase plan and completed it within five months.
Risks for Ryanair stock. Every company has strengths and weaknesses, and it's important investors know what those are.
One of Ryanair's most glaring risks simply stems from its nature: airline stocks are cyclical, which means shares tend to rise and fall along with the broader economy. This may partly account for RYAAY's low P/E ratio; markets could be signaling they don't expect robust earnings growth to continue.
Also, with the acknowledgement of pilot unions, Ryanair could subdue earnings growth and limit share buybacks and expansion. As the company decides to start ponying up more dough for slots at major airports across Europe, that initiative too may ding margins.
Plus, Europe tends to be a more highly regulated market than the U.S., and regulators could, down the line, take steps to rein in Ryanair's dominance if it gets too powerful.
Last but not least, there's currency risk. Ryanair takes in euros, not dollars, and U.S. investors have to invest with their greenbacks. If the dollar strengthens significantly against the euro, RYAAY's results will be negatively impacted.
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As always, it's important to weigh the risks before jumping into anything, but if you're looking to re-allocate, have done your homework and like what you see, RYAAY appears to be a solid pick for 2018.
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