Short sellers in Flight Centre are about to be squeezed

Short sellers have taken a particular liking to short selling shares in Flight Centre Travel Group Ltd (ASX: FLT), but could find themselves in trouble.

According to the latest data, Flight Centre is one of the most shorted stocks on the ASX – with 25% of shares shorted. Short sellers hope to profit by selling borrowed shares today in the hope of buying them at a cheaper price at a later date.

One reason short sellers are targeting Flight Centre is in the hope that the falling Australian dollar – now under US 70 cents – will discourage Australians from travelling overseas.

Time and time again, we’ve shown that Australians will still travel overseas no matter what the AUD/USD exchange rate is. There are a number of reasons for that…

  1. Only a small percentage of outbound travellers visit the US – around 12% of all Australians heading overseas. Most Australians travel to South-East Asia and countries like Indonesia, Thailand, China, Malaysia, Singapore, Japan, Philippines and Vietnam to name but a few, as well as New Zealand and the Pacific Islands.
  2. Travelling and working offshore is almost a ‘rite of passage’ for many young Australians – they will travel when they finish school or university – no matter what the exchange rate is.
  3. The same goes for retirees, who will usually still travel overseas, but might spend less at their destination, opting for cheaper accommodation and the like.
  4. International airfares remain cheap, particularly with the oil price falling. Fuel is usually an airlines’ greatest expense, and oil prices are less than a third of what they were 18 months ago. In November 2015, Flight Centre noted that 8 of the 10 airfares advertised on its main web page were on average 10% lower than in November 2014.
  5. Short-term departures are impacted more by consumer confidence than the exchange rate.

Despite the fall in the Australian dollar from above parity with the US dollar in early 2013 to around US 70 cents currently, Australian Bureau of Statistics (ABS) data shows a strong rising trend in overseas departures. It’s also important to note that when the Aussie dollar was trading above parity with the US dollar, there wasn’t a noticeable spike in outbound travel.

Flight Centre also has other tricks up its sleeve, including growing earnings from its 10 international operations – most profitable for five consecutive years and last financial year generated more than $100 million in earnings before interest and tax for the first time.

A number of recent bolt-on acquisitions should also help to grow earnings as Flight Centre diversifies into adjoining travel categories.

The company reported $364 million in underlying pre-tax profit (PBT) last financial year and is targeting underlying PBT of between $380 and $395 million in the 2016 financial year. Shares are currently trading on what appears to be a fairly cheap P/E ratio of around 15x when you consider the quality of the business and future potential growth in earnings.

Foolish takeaway

Short sellers have targeted Flight Centre in the past and been burnt. It appears they are on track to repeat the same mistake.

Motley Fool Pro is now open to new members Our most comprehensive and innovative ASX investment service -- has reopened for a brief time, to accept new members. That means you've got the chance to follow along as one top investor puts $1,000,000 of The Motley Fool's own money to work...all in ASX stocks. But to get YOUR front-row seat, you must act NOW. (Please note: just 1,000 new member seats are available.) Click here to claim YOUR invite!

Motley Fool writer/analyst Mike King owns shares in Flight Centre. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.