It hasn't been a great start to the week for shareholders of Flight Centre Travel Group Ltd (ASX: FLT). The leading travel agency has seen its share price plunge 7.5% to $30.52 despite there being no news out of the company.
Today's decline is likely to be attributable to a research note out of Morgan Stanley which revealed that its analysts have downgraded Flight Centre to an underweight rating and slashed their price target to just $25.00.
According to the note Morgan Stanley is concerned that Flight Centre's second half guidance is overly optimistic and they expect price deflation from international flights to hurt the company's results.
As much as I'm a big fan of Flight Centre and its management team, Morgan Stanley does make a valid point.
Last month at the company's annual general meeting management provided guidance for FY 2017. Like many companies Flight Centre believes the second-half of the financial year will be far stronger than the first.
In the first-half the company expects underlying profit before tax to come in between $105 million and $120 million. Whereas in the second-half it expects growth to accelerate and profit before tax to be in the region of $215 million to $235 million.
The reason for the disparity is largely down to the first-half being impacted by cheap airfares, Brexit, the U.S. election, and concerns over the Zika virus.
In the second half management expects stronger ticket volumes, stability from its UK business, and the benefits of cost saving strategies being implemented globally to result in an improved bottom line performance.
I have a lot of respect for Flight Centre's co-founder and CEO Graham Turner. Although it may be a big ask, he knows the business better than anyone and I'm willing to give him the benefit of the doubt on this one.
With its shares changing hands at just 13x estimated FY 2017's earnings, I believe Flight Centre provides patient buy and hold investors with a compelling risk/reward.
But for those of you that are not convinced about a second-half turnaround, Webjet Limited (ASX: WEB) might be the travel agent for you.