Flight Centre Travel Group Ltd (ASX: FLT) has seen its share price plunge 21% in the past few days after the company came out with a profit downgrade.
But CEO Graham 'Skroo' Turner says the sell-off may be overdone. I certainly agree with him – it's one reason why I topped up my holding earlier this week. Shares have fallen further since I purchased, offering the chance for Foolish investors to top up on a high-quality business.
There's one primary reason why investors were running scared and dumping stock. Mr Turner said the company was losing market share to online-only travel groups such as Webjet Limited (ASX: WEB), Expedia and Wotif.com, and US travel giant Priceline and its Booking.com site.
Expedia and Webjet, in particular, have increased their offering of dynamic package deals, such as flights and accommodation in competition with Flight Centre. Mr Turner says it is inevitable that some of those dynamic packages will go to the online travel agents. But as he points out, it was a 'really minimal loss' of market share.
Investment banking analysts were also running for cover, with some suggesting it was the start of a structural decline.
Structural challenges are different to normal cyclical issues companies face, such as weak consumer confidence. Newspapers, free-to-air broadcasters and retailers, particularly department stores, all faced structural challenges, which are real threats to their business. But this has ever been the case with Flight Centre. Many analysts and investors wrote the company off when the online-only travel platforms set up shop in Australia (Webjet was listed in 1997) and they were wrong then too. Flight Centre has managed to continue growing revenues and expanding, and clearly there's room for both type of travel agencies.
The reason Flight Centre has continued to be successful is that there is a need for travel agents to assist with more complex travel arrangements. Not only that, but through its contacts and supplier relationships, Flight Centre can often provide cheaper packaged travel than consumers can find on their own (I've tried several times). When it comes to all-inclusive packages, including connecting flights, several hotels, hire cars, airport transfers, day trips and the like, there really is no option but to use a travel agent. And if you run into problems, try telling a website your issue.
This situation is unlikely to change anytime soon, and those fearful investment analysts will probably be proven wrong…again. You only have to look at how successful Flight Centre has been in more mature offshore markets like the US to see that.
With a trailing P/E of 17.5 and a 4.5% dividend yield, Flight Centre looks attractive if you can handle the short-term volatility.
