Tom Winnifrith has already commented on Ryanair (RYA) and the latest traffic information from the same company does nothing to encourage me to bottom fish here. By contrast, the knock-on impact on easyJet (EZJ) shares - which I loved up on Saturday - has been pretty savage, pushing the shares down 10% odd since the Friday close…
I would say this is more opportunity than threat unless you are very pessimistic about the future UK-Europe relationship, as I talked about on Saturday, especially with the share now clearly on a single digit EV/ebit rating. Though, if easyJet has been all over the place, then Royal Mail (RMG) has had an absolute shocker, falling a quarter. Why the big fall?
Well the Royal Mail story has always been one centered on cost cutting because even with parcels growth (linked with e-commerce) there was not much growth going on - hence my previous observations that it is a utility-heavy stock. So spot the trouble if the 'UK productivity performance (is) significantly below plan (and)...2018-19 cost avoidance target lowered from £230m to £100m'. The net impact of all this? New profit expectations stand at £500 million (to £550 million), which is around a 20-25% downgrade, putting the stock at around a x8 EV/ebit ratio with a 6%+ dividend yield. I see there are a few brokers questioning whether the 6%+ dividend yield is now sustainable or not.
The Royal Mail is fortunate that it does have a strong balance sheet, so my instinct today would be not to worry too much about this. Far more important is whether the new CEO is presiding over a complete internal crisis or not, especially as the critical holiday season is not too far away. I kind of want to buy it here because a x8 rating and a big dividend for a utility stock - albeit one that is spluttering a bit - can still work. However, if you put a gun to my head and asked me to choose one, I would pick easyJet over it. Better growth realities always matter over time. Tom has also reviewed Royal Mail HERE.
Filed under: easyJet, Royal Mail, David Lenigas, Angus Energy, HaloSource, Premaitha, Purecircle
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