The Flight Centre Travel Group Ltd (ASX: FLT) share price has fallen more than 7 per cent to $34.05 this afternoon after the group revealed a significant downgrade to its forecast profit guidance.
The group now expects full year underlying profit before tax to be down about 2%-5% on the prior year’s result of $366 million. This compares to a prior profit forecast issued as recently as February for full year underlying profit to be up 2%-4% over the prior year.
This dramatic reversal suggests a strong swing in recent trading conditions which the Flight Centre CEO confirmed in a market update this afternoon: “In relation to current trading we are experiencing some uncertainty heading into the final six weeks of the year and during what is traditionally our busiest sales period, which makes it difficult to forecast results,” the CEO said.
Flight Centre admitted it has been adversely impacted by various factors including the Zika virus and airfare price wars in Australia, the UK and US. Australia also has an upcoming Federal election creating uncertainty, while in the UK next month’s Brexit referendum is shaking confidence over what is the key Summer holiday booking season.
Total transaction value for the full year is still expected to exceed $19 billion globally (compared to $17.6 billion in FY15). However, the issue is that margins are being wrecked by the aforementioned external factors and investments being made to help the business adjust to the digital future.
Flight Centre has long divided investors as to the sustainability of its bricks-and-mortar shop front business model and today’s business update heavily referenced investments being made to increase its digital capabilities across its huge number of businesses around the world.
The company still ticks the boxes as a sound investment across many metrics however, with a highly-experienced founder in charge and the tailwind of the incremental long-term demand growth for travel services around the world.
It also has $429 million cash on its balance sheet and just $21 million in debt, which means it possesses the firepower to easily ride out the toughest storms as it invests for sustainable growth.
After today’s downgrade it is possible to assume it will earn in the region of 240 cents per share in FY16, which would place it on just under 14x estimated earnings per share when selling for $34.
Recent media reports and fund manager selling suggests many were already pricing in a downgrade to Flight Centre’s profit forecasts and today’s price falls seem a modest reaction to what is quite a substantial downgrade.
Over the short term, I would not be surprised to see shares fall further from today’s levels around $34 as analysts (already nervous over the outlook) revise their price targets and recommendations.
Other travel stocks on the nose after the news of Flight Centre’s downgrade include Corporate Travel Management Ltd (ASX: CTD) and Webjet Limited (ASX: WEB). They are down 1.8% and 2.3% respectively this afternoon, as the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) index trades just 0.3% lower.