The travel sector has created some of the most interesting investment opportunities over the past 12 months and this trend looks set to continue.
Corporate Travel Management Ltd (ASX: CTD) has been the clear out-performer in the sector with a gain of 67% over the last year. After an impressive last two weeks, Webjet Limited (ASX: WEB) has rocketed to second place with Flight Centre Travel Group Ltd (ASX: FLT) being the laggard in the group following a number of downgrades over the past 18 months.
Source: Google Finance
Although all three companies operate in the same sector, they each have vastly different valuations. The question investors should ask is which company now offers the best value for future gains?
Corporate Travel Management
Corporate Travel focuses on corporate and business travel management solutions that are cost effective and convenient for its customers.
It has operations in 23 countries and has been able to grow its earnings consistently for the past 20 years.
Management recently announced an earnings upgrade for the full year on the back of continuing strong growth and a new strategic partnership which will enable greater penetration into the huge Asian travel market.
Although the share price has recently fallen from its 52-week highs, the current valuation still appears expensive. Shares are currently trading on a price-to-earnings ratio (P/E) of around 35 and investors can expect to receive a dividend yield of around 1.5%.
Corporate Travel has proven itself as a true growth stock over the past five years but investors need to be cautious with stocks that trade at such large premiums as any negative news can bring the share price crashing down.
Webjet has enjoyed a huge resurgence over the past two weeks as investors welcomed some good news from the online travel agent. The share price has increased by more than 43% since management provided an update that showed a 41% increase in total transaction value (TTV) for the six months to 30 June 2015.
Investors also cheered the news that earnings guidance for the full year was re-affirmed and possibly more importantly was the fact that margins were maintained during the period.
The Zuji business that was acquired two years ago had been a major drag on earnings since its acquisition, but it appears sales in this division have also finally started to trend in the right direction.
Following the huge spike in the share price, Webjet is now trading on a P/E ratio of around 18 and should provide investors with a fully franked dividend yield of around 3%.
Although Webjet has had a history of inconsistent earnings over the past three years, investors who are confident that sales momentum will continue into the new financial year should see reasonable value at these prices.
Flight Centre has experienced a turbulent 18 months as a result of multiple earnings downgrades and fears about the potential impact of overseas competitors on its future growth potential.
In my opinion, Flight Centre offers an attractive value proposition for investors seeking growth and income. Although there are a number of short-term headwinds, the long-term outlook is still quite bright especially for its overseas business units.
Although the shares have staged a mini rally over the past week, the valuation still appears quite attractive. The company is trading on a P/E ratio of under 14 and investors will receive a fully franked dividend yield of around 4.5%.
All three companies should enjoy favourable market conditions over the long term, but based on the current valuations, I think Flight Centre is the clear choice for long-term value investors.
Although the company faces some short term issues, the strength of its brand and balance sheet should allow it to take advantage of growth opportunities when they arise.
Flight Centre might be a good long-term bet but if you want a guaranteed winner then you need to keep reading!
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Motley Fool contributor Christopher Georges owns shares in Flight Centre. The Motley Fool Australia has no position in any of the stocks mentioned. 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.