Investors who bought Flight Centre Travel Group Ltd (ASX: FLT) shares at the beginning of January 2015 and held on to them will definitely be happy with the 40% gain they have seen. Those investors who purchased at the beginning of 2014 would not be so happy. After reaching $55 a share, the share price fell into a strong downtrend until it reached a low of $31.41 in late December 2014. The share price has since rallied but investors have to deal with more volatility than they once did.
The main reason for the share price decline was a result of lower growth from the Australian leisure business which makes up a big part of the group's revenues. Consumer sentiment in Australia was still weakening at the time and fewer people were booking holidays which was impacting growth in sales. The market had the stock valued for strong growth and it was punished as soon as it became apparent the growth forecasts were not going to be met. While some decline in the share price was warranted, the level of decline may have been an overreaction and savvy investors had the opportunity to pick up the stock at a discounted level.
Is it too late to buy Flight Centre?
Flight Centre is a household name in most Australian households with excellent brand awareness. Unlike many other travel agencies, the company not only operates online websites but also runs traditional bricks-and mortar-stores. Flight Centre has also been successful in its overseas expansion with operations in the UK, USA, Canada and selected parts of Asia. The company is now one of the world's largest travel agency groups and operates nearly 2,800 physical locations.
I think the stock is fairly priced at the moment. It is trading on a price-to-earnings ratio of about 16.5 times FY15 forecast earnings. Flight Centre also offers a reasonable 3.6% fully franked dividend which has been growing steadily. If the share price falls below $40, I would definitely consider that as a buying opportunity.
The outlook for the Australian business has improved slightly and lower oil prices may stimulate demand should flights become cheaper. The international segment of the business continues to grow strongly and it seems this might be the driver for growth in the future. After starting as a leisure travel agency, the company is now also one of the world's largest corporate travel managers through a network of specialist brands. Investors just have to look at Corporate Travel Management Ltd (ASX: CTD) to see how lucrative this segment of the market is. Flight Centre has very little debt and is also sitting on a pile of cash which it can use for expansion and acquisition. It most recently announced an expansion into Mexico and has proven it is able to export its business model successfully.
Foolish takeaway
There is a lot to like about Flight Centre and although the level of growth may have slowed in Australia, its overseas business is growing strongly. Flight Centre has a strong competitive advantage thanks to its brand awareness and large network. While the stock looks fairly valued at the moment, any drop in the share price may be a buying opportunity.
