Morgan Stanley downgraded Ryanair to "equal-weight" as valuation concerns grow

Investing.com -- Morgan Stanley (NYSE:MS) has downgraded Ryanair to "equal-weight" from "overweight,” citing concerns over valuation following a strong 50% rally in the airline’s stock since last summer, in a note dated Thursday. 

Shares of the airline were down 2% at 07:20 ET (12:20 GMT).

While the European short-haul market remains tight, supporting pricing, the brokerage believes that the full valuation limits further upside, making Ryanair’s shares less attractive compared to other players in the sector, particularly Jet2.

The downgrade reflects a shift in Morgan Stanley’s outlook on the ultra-low-cost carrier. The analysts acknowledges Ryanair’s strong financial position and positive revenue environment but flags the increasing challenges posed by slowing seat growth and rising operational costs. 

With Boeing (NYSE:BA) 737 MAX delivery delays impacting the airline’s expansion plans, Ryanair’s capacity growth is expected to decelerate, adding cost pressures. 

Additionally, carbon-related expenses are becoming a more material factor, further complicating the cost outlook.

While Ryanair continues to generate solid free cash flow, Morgan Stanley notes that the sharp rise in its stock price has lowered its free cash flow yield, making it less compelling relative to its historical levels. 

The brokerage estimates that Ryanair will offer an average free cash flow yield of around 5% over the next five years, a level that is no longer significantly higher than other industry players with strong cash flow profiles.

Morgan Stanley’s analysis suggests that Ryanair’s future earnings growth will increasingly rely on margin expansion rather than top-line growth. 

However, given the constraints of a tightening market and potential cost headwinds, achieving this expansion may prove difficult. 

The analysts project an 8% compound annual growth rate in earnings before interest and taxes from FY26 to FY30, a figure it considers reasonable but not strong enough to warrant a more bullish rating.

The downgrade comes as Morgan Stanley shifts its preference toward Jet2, whose shares have declined by 12% year-to-date, making them appear undervalued. 

Morgan Stanley believes that Jet2 offers more upside potential given its attractive valuation and revenue growth prospects.

Despite the downgrade, Ryanair remains a key player in the European aviation market. The airline’s strong balance sheet gives it room to navigate challenges, and Morgan Stanley acknowledges that if Ryanair were to use its financial strength for buybacks or other shareholder-friendly initiatives, it could boost earnings growth. 

However, with current management priorities focused on maintaining liquidity and debt reduction, such moves appear unlikely in the near term.

For now, Morgan Stanley sees Ryanair as fairly valued rather than underpriced, prompting its shift to a more neutral stance on the stock.