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Are Flight Centre Travel Group Ltd shares far too cheap?

Air New Zealand plane
Credit: Woodys Aeroimages

Flight Centre Travel Group Ltd (ASX: FLT) shares are cheap.

We previously showed why it should be considered a buy here, here and here.

And following the release of its full-year profit result last week, the market is once again falling over itself to get a slice of this great Australian business.

Sure, competition from the likes of and Webjet Limited (ASX: WEB) for cheap domestic and international flights is growing.

But Flight Centre goes well beyond the computer screen to offer an unrivalled customer experience to Australian travellers through its 1,511 stores nationwide.

And while short-term consumer confidence wobbles are arguably Flight Centre shareholders’ biggest concern in the immediate future, the group also has more than 1,300 international stores in huge consumer markets which are rebounding strongly.

In 2015, for example, the United States and the United Kingdom continued to grow profits strongly.

Flight Centre USA and UK Continue to Power Ahead

FLT UK and USAData sourced from Annual Reports.

While these two businesses, combined with its ‘Rest of World’ operating division, account for just 21% of group profit before tax, they will not only help offset weakness in the local market but provide excellent long-term growth prospects for the company.

Then there’s the group’s sound cash position (it had $564 million of cash at June 30 – up from $476 million a year earlier), attractive profit margins and savvy capital allocation strategy.

Flight Centre Trailing and Forecast Free Cash Flow and EBIT Margin

FLT EBIT Marg and FCFData sourced from Annual Report; forecasts are my own.

Given Flight Centre’s cheap share price, modest long-term growth potential and excellent profitability and cash flow generation, it is little wonder analysts at Deutsche Bank were quoted in the Australian Financial Review today as saying: “We believe the stock is far too cheap given its strong cash generation and reasonable growth profile.”

How ‘cheap’ is cheap?

I can’t comment on Deutsche’s valuation. However, I also believe Flight Centre shares are cheap.

FLT DCFI recently stated that my conservative fair value estimate of Flight Centre shares lay somewhere around $40.54. However, using my updated growth and margin assumptions found in the chart above, and a discount rate of 9.31%, my fair value estimate jumps to around $42.28.

It’s important to note however that a discounted cash flow (DCF) analysis is only part of a value investor’s toolkit, and I’m yet to fully update the entire model.

But considering the quality of Flight Centre’s management team, its cash hoard and dominance in the Australian travel market, I’m happy to say its shares are a good buy for the long term (five years or more).

Especially, when shares of the $3.7 billion company are trading at just $37.20.

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Returns As of 6th October 2020

Motley Fool contributor Owen Raskiewicz has a beneficial interest in Flight Centre (through a managed fund).

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.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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