Despite an uncertain macroeconomic environment, the travel industry is anticipated to witness robust demand in the upcoming months. Given the industry’s growth prospects, investors could consider buying fundamentally sound travel stocks Ryanair Holdings plc (RYAAY), Air France-KLM SA (AFLYY), and Cathay Pacific Airways Limited (CPCAY) for solid returns.
Before diving deeper into their fundamentals, let’s discuss what’s happening in the travel industry.
The travel industry has seen a steady rebound due to pent-up demand for leisure travel, resulting in a surge in demand for hotels, airlines, and cruise lines over the past two years.
According to WTTC’s Travel & Tourism Economic Impact 2023 global trends report, the U.S. Travel & Tourism sector’s GDP contribution grew by 16.9% to $2 trillion in 2022. Also, the sector has created 2.7 million jobs since 2021. Also, WTTC predicts that the sector’s GDP contribution will be $2.2 trillion in 2023, with 17.4 million jobs.
The International Air Transport Association (IATA) reported that total traffic increased by 28.4% in August 2023 compared to August 2022. Also, international traffic increased by 30.4% over the same month last year. All markets increased by double digits year-over-year. International RPKs have reached 88.5% of their August 2019 levels.
Moreover, the global airline industry is expected to grow at a CAGR of 25.5% until 2027. Airlines are using technology to improve the customer experience, streamline operations, and remain competitive.
The worldwide travel and tourism market is predicted to grow at a 4.4% CAGR to $1.02 trillion by 2027. This development is influenced by factors like rising disposable income and rising interest in experience travel. Also, the development of the tourism and travel market has been aided by technological developments and the simplicity of online booking platforms.
Considering these conducive trends, let’s look at the fundamentals of the three Airlines stock picks, beginning with number 3.
Stock #3: Ryanair Holdings plc (RYAAY)
Headquartered in Swords, Ireland, RYAAY offers scheduled passenger services in Ireland, the United Kingdom, Italy, and internationally. Also, it provides various ancillary services like non-flight scheduled and internet-related services; and markets car hire, travel insurance, and accommodation services.
On August 8, 2023, RYAAY introduced a new convenience service at Manchester Airport, allowing passengers traveling on morning flights until 8:00 a.m. to drop off their checked bags the previous evening (between 7:00 p.m. and 10:00 p.m.).
RYAAY’s Head of Communications, Jade Kirwan, said, “As Manchester’s No.1 airline, we’re delighted to launch our new ‘Twilight Bag Drop’ service for all our customers traveling from Manchester Airport this summer. This complimentary service will further improve our passengers’ overall travel experience and further reduce airport queuing times for those taking early morning flights.”
RYAAY’s forward EV/EBITDA multiple of 5.37 is 50.6% lower than the industry average of 10.86. Its forward EV/EBIT multiple of 8.16% is 45.5% lower than the industry average of 14.97.
RYAAY’s trailing-12-month levered FCF margin of 16.03% is 183.4% higher than the 5.66% industry average. Its trailing-12-month ROCE of 28.95% is 113.1% higher than the 13.59% industry average.
RYAAY’s revenues for the fiscal 2024 first quarter that ended June 30, 2023, rose 40% year-over-year to €3.65 billion ($3.96 billion). Its profit after tax was €663 million ($721.01 million), an increase of 290% from the prior year’s corresponding period. The company’s profit for the period was €662.90 million ($720.90 million), up 253.6% year-over-year.
Furthermore, the company’s EPS increased 252% year-over-year to €58.22.
Street expects RYAAY’s revenue to increase 18.9% year-over-year to $13.86 billion for the year ending March 2024. Its EPS is expected to grow 30.2% year-over-year to $8.82 for the same period. It has surpassed EPS estimates in three of four trailing quarters. Over the past year, the stock has gained 50.3% to close the last trading session at $92.29.
RYAAY’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
RYAAY also has a B grade for Growth, Sentiment and Quality. It is ranked #9 out of 28 stocks in the B-rated Airlines industry. Click here to see the additional POWR Ratings for Value, Stability, and Momentum for RYAAY.
Stock #2: Air France-KLM SA (AFLYY)
Based in Paris, France, AFLYY provides passenger transportation. It also engages in cargo services, aeronautics maintenance, and other air transport-related activities. The company’s sub-groups, Air France and KLM, have the Flying Blue flyer program, allowing members to earn miles from airline and non-airline partner transactions.
AFLYY’s forward EV/Sales multiple of 0.33 is 80.5% lower than the industry average of 1.68. Its forward non-GAAP P/E multiple of 3.43% is 80.7% lower than the industry average of 17.78.
AFLYY’s trailing-12-month CAPEX / Sales of 9.97% is 239.7% higher than the 2.94% industry average. Its trailing-12-month asset turnover ratio of 0.87x is 7.3% higher than the 0.81x industry average.
For the fiscal second quarter that ended June 30, 2023, AFLYY’s total revenues increased 13.3% year-over-year to €6.52 billion ($7.09 billion). Its EBITDA grew 42.6% from the year-ago value to €1.33 billion ($1.45 billion). Also, net income for the quarter rose 88.3% year-over-year to €612 million ($665 million).
The consensus revenue estimate of 31.47 billion for the year ending December 2023 represents an 11.5% increase year-over-year. Its EPS is expected to come in at $0.38 for the same period. AFLYY’s shares have gained marginally intraday to close the last trading session at $1.33.
AFLYY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked #2 in the same industry. It has an A grade for Value and a B for Growth, Stability and Quality. To see additional AFLYY ratings for Sentiment and Momentum, click here.
Stock #1: Cathay Pacific Airways Limited (CPCAY)
Headquartered in Lantau Island, Hong Kong, CPCAY, with its subsidiaries, operates as a carrier of international passengers and air cargo. The company conducts airline operations principally to and from Hong Kong.
CPCAY’s forward EV/Sales multiple of 1.23 is 27.1% lower than the industry average of 1.68. Its forward EV/EBIT multiple of 8.83% is 42% lower than the industry average of 15.22.
CPCAY ’s trailing-12-month levered FCF margin of 38.59% is 582% higher than the industry average of 5.66%. Its trailing-12-month EBIT margin of 15.03% is 53.3% higher than the 9.8% industry average.
CPCAY’s total revenue for the first half that ended June 30, 2023, rose 135% year-over-year to HK$43.59 billion ($5.55 billion). Its operating profit came in at HK$8.77 billion ($1.12 billion), compared to an operating loss of HK$1.25 billion ($159.67 million) for the same period.
Also, its net income came in at HK$4.27 billion ($543.88 million), compared to a net loss of HK$5 billion ($637 million).
Analysts expect CPCAY’s revenue to increase 84.6% year-over-year to $12 billion for the year ending December 2023. The stock has gained 2.9% over the past year to close the last trading session at $5.04.
It’s no surprise that CPCAY has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Growth and Quantity and a B for Stability and Sentiment. It is ranked first in the Airlines industry.
Beyond what is stated above, we’ve also rated CPCAY for Momentum and Value. Get all CPCAY ratings here.
What To Do Next?
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RYAAY shares fell $1.40 (-1.52%) in premarket trading Wednesday. Year-to-date, RYAAY has gained 21.58%, versus a 14.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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