How much thought did you put in to where you did your most recent internet search? If you are like most of us you probably didn't think twice. Your brain instantly associated an internet search with your search engine of choice, habit kicked in, and your mouse and keyboard did the rest. Logically there shouldn't be significant, if any, switching cost between search engines; a click or two and you can easily jump to the next page. Yet that habit kicks in, and before you know it years have passed since you last used anything else.
For over 15 years Webjet (ASX:WEB) has worked to build exactly that kind of habitual brand association among Aussie travellers. The other day a friend was using Webjet and complaining about how expensive Christmas flights were to New Zealand. Why don't you check out a few other flight portals to compare? "Sure. I probably should I guess." They didn't. Not every Australian uses Webjet, but for those that do the power of that kind of automatic association cannot be understated.
Up and away
Despite recent analyst pessimism, Webjet has remained one of the ASX's fastest growing companies. Over the past 5 years it has grown sales at a compound annual rate of 28% and net profit at 20%. In the 2014 financial year results released in August, Webjet reported yet another strong year with revenues up 31.9% and net profit jumping a whopping 195%.
Webjet's loyal customer base has enabled the company to enjoy the kind of operating metrics that most businesses could only dream of. Webjet's gross profit margin is a huge 78%, while its net profit margin clocked in at 19.4% in 2014. Like most web-based aggregators, the business itself is capital light, with strong returns on invested capital. Despite holding no net debt, Webjet enjoys returns on equity of an envy-inducing 28%.
Low expectations
How much should we pay for a company with high growth rates, strong economics, and a rock solid balance sheet? Webjet currently trades for a paltry 12 times trailing earnings. To be fair, the 2014 result was boosted by a couple of one-offs, a lower tax rate and the gain on sale of some assets. But even if we strip these out then Webjet is still trading at only 15.5 times adjusted trailing earnings.
So why all the pessimism? Webjet has fallen out of favour with many analysts who see the company's best days behind it as international competition encroaches on its core travel booking business.
There is no doubt that the online travel market will see increased competitive pressure as more business moves online. However this pessimism ignores Webjet's strong automatic association with online travel in the minds of its customers. This habitual behaviour has meant that despite increased competition Webjet has been defending and even growing its share of the Australian online travel market.
Lots of Opportunities
Webjet isn't just playing defence, however. Over the past three years CEO John Guscic has acquired a significant competitor, Zuji, and aggressively streamlined operations. Guscic has also used his previous hotels experience to establish an entirely new business-to-business hotels business in the Middle-East and Europe, Lots of Hotels.
The new Lots of Hotels business is still small but it is growing fast, with total transaction volume doubling in the last full year results. Webjet also expects the margins on this business to almost double within the next year as it starts to reach scale. As expanding transaction volumes combine with wider margins this new growth area could soon become too large to ignore.
