Flight Centre: Cheap, and flying below the radar


Flight Centre Limited’s (ASX:FLT) share price is down 28% since 12 months ago, currently trading around $17.68. The S&P/ASX 200 index is down 12.5% over the same period. One of its competitors, Jetset Travelworld Limited (ASX:JET) is also down 24%, but funnily enough WebJet Limited (ASX:WEB) is up 3% and Corporate Travel Management (ASX:CTD) is up 13%. So why has Flight Centre’s price fallen by so much?

Flight Centre’s last announcement to the ASX was on 27October 2011 where they indicated that pre-tax profit for 2012 would be higher by 25-30% than 2011’s $245m underlying pre-tax profit, barring any un-expected abnormal items.

The company also stated “It is of course, early days and it is premature to assume that this trend (of 25-30% growth) will continue.” and “At this stage, we remain comfortable with our full year guidance.”

The company had previously guided that 2012’s pre-tax profit would be in the range of $265m to $275m. If the company achieves $265m in pre-tax profits, that’s only 8% more than 2011’s $245m.

For the sake of this article, (and always being conservative) I’m going to assume that Flight Centre records a $265m pre-tax profit in 2012. Using the 30% company tax rate, net profit should be around $185m, which suggests earnings per share of $1.85, which is fairly close to analyst consensus estimates of $1.90. At current prices this equates to a PE ratio of just 9.5, which seems very low for a quality company like Flight Centre.

The dividend payout ratio have been around 50% for last two years. Assuming Flight Centre sticks to that in 2012, the dividend should be around 96 cents. This also happens to be around consensus estimates and equates to a fully franked dividend yield of 5.5%.

About Flight Centre
Flight Centre is engaged in the travel retailing and wholesaling businesses. The company, through its retail and corporate brands, provides a complete travel service for leisure and business travellers in Australia, New Zealand, the United States, Canada, the United Kingdom, South Africa, Hong Kong, India, China, Singapore and Dubai.

In addition, the company’s corporate travel management network, FCm Travel Solutions, extends to more than 40 other countries through strategic licensing agreements with independent local operators. Its other leisure, corporate and wholesale brands include Escape Travel, Travel Associates, Student Flights, quickbeds.com, FCm Travel Solutions and Kistend and Campus Travel.

Has Mr Market lost his mind (again)?
I’m struggling to work out why the market has taken a dislike to Flight Centre’s shares.

Tracking the A$/US$ exchange rate is usually a good guide to Flight Centre’s share price, given the impact the exchange rate has on the company’s profits. A year ago the exchange rate was 0.99, it’s now $1.03.

As you can see from chart below, the monthly share price bears no relationship to the exchange rate over the last twelve months. If anything, the share price should be slightly higher than it was twelve months ago, when it was trading around $22.

Source: Historical exchange rates from oanda.com, prices from Yahoo Finance

The company has not reported any adverse conditions impacting 2012’s results either. Flight Centre had a net cash position (as at 30June 2011) of $209m, so its unlikely to come under any financial stress should profits reverse course next year. This is no Billabong!

The Foolish bottom line
Given Flight Centre’s continued growth, the positive forecast for 2012, the low forecast PE of less than 10, the prospective fully franked dividend yield of over 5% and trading at a discount to my conservative valuation of around $20, Flight Centre certainly deserves a closer look.

If Flight Centre doesn’t fly your kite, you might want to check out another similarly cheap, growing company. All you need to know, including the company’s name, is in our free reportThe Motley Fool’s Top Stock For 2012Click here, whilst it’s still free and available.

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Motley Fool contributor Mike King owns shares in Flight Centre. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.

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