It has been almost six weeks since Flight Centre Travel Group Ltd. (ASX: FLT) reported a downgrade in its 2015 underlying profit before tax to between $355 million and $365 million. This was its second downgrade in a little over six months, and the market punished the stock accordingly, pushing it down by more than 20%.
Whilst the downgrade represented a 7.5% fall in underlying profit, the stock is still trading down 15% from its pre-downgrade price. This represents an excellent opportunity to buy a quality stock before the market realises it has treated it too harshly.
Flight Centre is one of the world’s largest travel agents, and has been the industry leader in the Australian market for many years. In fact, 60% of its earnings are from the Australian market, which in turn generates almost 80% of its profits.
For many years analysts have predicted that digital disruption would cripple Flight Centre. More recently they have raised concerns that the company is losing market share to locally listed players Webjet Limited (ASX: WEB) and Corporate Travel Management Ltd (ASX: CTD), and U.S. travel giants Expedia and Priceline.
Flight Centre is a strong brand with a long history of growing revenues and expanding, while dealing with constant change in the travel industry. Its resilience is underpinned by its strong cash flow and balance sheet, with roughly $500 million in cash available. It is forecast to deliver a full year, fully franked dividend of $1.55 per share, which represents a 4.3% yield – not too shabby when you look at current bank interest rates.
The company has a history of steadily increasing dividends, and going forward, the franked dividend is forecast to rise to $1.62 per share in 2016, representing a 4.5% yield. This yield compares favourably to that forecast for Webjet and Corporate Travel Management. And don’t forget the company has a growing overseas presence from which it expects to unleash higher earnings and profit in the future.
The consensus target price amongst analysts currently sits at $39.83. At the last close price, this represents over 10% upside if the analysts have it right. The stock is still 25% off its yearly high, so there could be more blue sky to come.
There is no doubt Flight Centre faces short-term headwinds with wage pressure, a slowing domestic market and a continuing decline in the Australian dollar. Still, I believe Flight Centre will be a much larger business in the future. With its healthy dividend yield, it represents a good buy for income investors at current prices, with the added potential of share price growth.
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Motley Fool contributor Brett Bearham has no position in any stocks mentioned. 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.
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