The Brexit selloff has turned to gains for the major indices, but a few sectors are still trading lower and with an air of uncertainty around unknown risks. In response to the uncertainty about the regional economy, trade and the ability to move workers easily investors are focusing on the negative consequences of the vote. 

#-ad_banner-#One company in particular could see an upside in overall sales, as well as a higher market share in its business segment. 

If the potential for stronger sales were not enough, shares are trading at a 35% discount to the long-term price multiple.

Air Traffic Is Improving And Could Be Ready To Jump
Ryanair Holdings (Nasdaq: RYAAY) is Europe’s largest airline by passenger traffic with service throughout the region, counting Britain as its single largest market. Shares plunged 17.6% after the Brexit vote and are still 19% off their 52-week high set in December. 

Shares have tumbled despite strong passenger traffic growth. June traffic was up nearly one million passengers to 10.6 million compared to 9.5 million in June 2015 even after having to cancel hundreds of French flights due to a strike by air traffic controllers. The company’s load factor, the percentage of filled seats, also improved 1% to 94% in June.

Besides the strike in France, European air travel has also seen weakness over recent terror attacks in Paris and Brussels. Traffic could continue to increase as these events fade from memory and as European travelers get what amounts to a discount on UK shopping.

The British pound (GBP) had been trading around €1.30 since February but has plunged to €1.20 since the Brexit vote. That means GBP prices are now 7% cheaper for European travelers. A pre-Brexit survey by Europe’s largest online travel agency, Kiwi.com, found nearly 80% of EU travelers saying they would still visit after the vote… and that was before prices went on a currency-fueled discount.

Any drop in business travel to London may be picked up by Dublin, where Ryanair is based, when it becomes the largest English-speaking region in the EU after Britain exits. As a budget airline, Ryanair should do relatively well against peers in the event the European economy struggles and sends business travelers looking for value.

Management announced its largest share buyback program ever in February, planning to return €885 million to investors over the remaining nine months of the year. It ended up buying back all its remaining authorization immediately after the Brexit vote and will hold a shareholder vote July 27 for another buyback authorization that will last 15 months. 

Free cash flow of over $945 million over the last four quarters and nearly $4.9 billion in balance sheet cash could mean a wave of repurchases on top of the 4.8% dividend yield.

The Post-Brexit Stock Slide Is Overdone
Management had previously estimated a £0.01 change in the GBP/EUR rate would impact earnings by about $16.6 million, or $0.06 per ADR share. In May, management guided to between $1.54 billion and $1.6 billion in full year 2017 earnings, for year-over-year growth of 11% to 15% on assumed 9% traffic growth.

Those estimates on the exchange rate impact imply roughly a $0.78 per ADR share cut to post-Brexit earnings per share. 

The average earnings estimate for current year 2017 among four firms before the Brexit vote was for $7.24 per ADR share. The average analyst estimate has now dropped to $6.12 per ADR share, $1.12 per ADR share below the previous estimate.

However, using management’s pre-Brexit estimate of the rate impact would put earnings closer to $6.46 per ADR share, well above the post-Brexit consensus.

Favorable fuel costs and increased tourist traffic to the UK could help Ryanair surprise on the upside for the rest of the year. Any weakness in the economy could weigh on business traffic but the company’s budget model should hold up relatively well against premium carriers. The travel limitations around Brexit will not go into effect for years even if the UK carries through with leaving the European Union.

Shares currently trade for 11.3 times expected 2017 earnings per ADR share, a discount of 35% on the 17.4 average multiple over the last five years. I believe the company can beat expectations to at least $6.40 per ADR share on strong traffic growth and shares could reach $86.40 on a modest 13.5 times multiple.

Risks To Consider: Uncertainty around the Brexit aftermath could weigh on investor sentiment until actual earnings are reported in late July and November.

Action To Take: Take advantage of the Brexit selloff to go long on Europe’s largest budget airline ahead of an increase in tourist traffic and a cheap valuation.

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