Travel agent Flight Centre Travel Group (ASX: FLT) has seen its share price slip by around 10% since hitting an all-time high of $55.72.
Some investors may look at the current share price of just over $50 and judge it expensive, without looking much further. Others may wonder how a bricks-and-mortar travel agent has managed to continue competing against purely online travel booking companies, such as Webjet Limited (ASX: WEB), Helloworld Ltd (ASX: HLO) –ex-Jetset Travelworld, and Wotif.com Holdings Limited (ASX: WTF).
Here are three reasons why they could be wrong…
1) When you consider that Flight Centre has delivered average shareholder returns of more than 50% a year over the past five years, a prospective P/E ratio of just 17 times earnings in the 2015 financial year suggests the company is cheap at current prices.
2) A growing portion of company’s earnings are derived from offshore, including China, India, the United Kingdom, South Africa and Dubai amongst others. The USA is growing revenues at a fast pace, but is not yet profitable. That could be expected to change in the near future.
3) Flight Centre holds $1 billion in cash and growing fast, with around $600 million of that in customers’ funds (prepaid for travel), giving the company a ready float that it can earn investment income on – for free.
Add in the prospect of a lower Australian dollar, which would boost offshore earnings, compound earnings per share growth of 12% over the past five years, low levels of debt and excellent management with a significant stake in the business, and Foolish investors might want to take advantage of the recent pullback in share price.
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Motley Fool writer/analyst Mike King owns shares in Flight Centre. You can follow Mike on Twitter @TMFKinga