Investors might be feeling a little stumped on what to do as shares in Flight Centre Travel Group Ltd (ASX: FLT) fell 3.2% to $42.70 this morning after its big rally yesterday.
The question is whether the drop is just profit taking by short-term traders, which, in turn, would represent a good buying opportunity for those with more patience.
The profit taking theory does hold water given that the stock jumped over 10% to a more than two-year high of $44.10 on Wednesday after management issued a surprisingly bullish profit forecast for the year ended June 30, 2017.
Flight Centre announced that its underlying profit before tax will range between $325 million and $330 million for FY17, which is at the top end of management's previous guidance and is primarily due to robust trading conditions in the fourth quarter of the financial year.
Those who dabble in technical analysis will also be excited as the stock has clearly broken its longer-term downtrend since the stock peaked at $54.78 in March 2014, with five profit downgrades over the past three years.
The new profit guidance should trigger an upgrade in consensus forecasts for the company by leading brokers.
However, this morning's drop in Flight Centre's share price on higher than average volumes could herald something more sinister as a number of brokers have actually downgraded the stock on the back of the pleasing profit forecast.
For instance, Citigroup cut its recommendation to "sell" as the broker thinks the share price already factors in all the good news from optimistic organic growth to a successful major cost out program. Further, demand growth from outbound resident departures has turned negative in recent months and this is a key leading indicator for Flight Centre.
Credit Suisse has also dropped its recommendation on the stock to "underperform" from "outperform" as it encouraged investors to take profit with the stock overshooting what it deems as fair value.
Meanwhile, Macquarie Group Ltd (ASX: MQG) has used the opportunity to reiterate its "underperform" rating on the embattled travel agency as the broker warns of continued airfare softness in FY18, which will depress operating margins over the medium term.
I too find it hard to feel optimistic about Flight Centre as the stock is hardly considered a value buy as it sits on a FY18 consensus price-earnings (P/E) multiple of around 19 times. Any upgrade to consensus is unlikely to bring this figure down by much.
I am not against paying a premium for a quality business, but I don't think Flight Centre fits the bill when compared to other travel-exposed stocks like Sydney Airport Holdings Pty Ltd (ASX: SYD).
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