A wipeout for Flight Centre Travel Group Ltd: What you need to know

Flight Centre Travel Group Ltd (ASX:FLT) has fallen into a nosedive on the back of another earnings downgrade.

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Shares of travel agency Flight Centre Travel Group Ltd (ASX: FLT) fell into a nosedive shortly after midday upon another earnings downgrade.

The stock hit a near four-month low, falling 14.8% to just $36.99, compared to a 1.3% lift for the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). In a market sensitive update, Flight Centre warned that its underlying profit before tax (PBT) will fall significantly short of the record ($376.5 million) it achieved in 2013-14 predominantly due to weakness experienced in the local market.

This comes as a result of heavy discounting activity (resulting in lower revenues and weaker gross margins) due to the mining downturn which has impacted corporate spending, as well as subdued consumer confidence levels.

Indeed, Australian leisure turnover is up just 2.7% for the year, which compares to the 8.5% compound annual growth rate Flight Centre has achieved over the past five years.

On a more pleasing note, total transaction value (TTV) in Australia will exceed last year’s sales milestone while its international businesses will deliver “solid profit growth” for the year. Unfortunately however, that won’t be enough to save the company from a lower profit result.

Flight Centre now expects its underlying PBT for the 12 months to 30 June 2015 to be between $355 million and $365 million, the mid-point of which is at the bottom of the company’s targeted range of $360 million and $390 million for the full-year.

It’s also 4.4% lower than the record achieved during 2013/14. Notably, travel insurance business Cover-More Group Ltd (ASX: CVO) (for which Flight Centre is a major distributing partner of its products) has also been hammered following the announcement with its shares down 5.2% at $2.36.

Should you buy?

Although today’s profit downgrade is disappointing, there is still a lot to like about Flight Centre as a long-term investment. To begin with, the company maintains a strong cash balance (it expects to finish the year with a record balance in excess of $500 million), while it also maintains a strong competitive advantage and high returns on equity. While it might be a somewhat turbulent ride in the near-term, today’s heavy sell-off could represent a reasonable buying opportunity for investors willing to remain patient in the long run.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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