Back on May 10, I wrote that the recently released budget and looming federal election would make it hard for Flight Centre Travel Group Ltd (ASX: FLT) to achieve its original guidance of 4%-8% growth. I went on to make the point that if a downgrade did occur it would present the opportunity to buy a great company at a great price. On May 23, Flight Centre announced a profit downgrade for earnings of 2%-5% lower than its previous year’s earnings. This news has sent its price falling from over $40 on May 10 to around $32 today.
While the market is obviously worried about the future, I believe none of the current problems are permanent or will affect how Flight Centre performs into the future. Below are the five key reasons investors should maintain faith in Flight Centre.
- Graham Turner CEO of Flight Centre.
If asked to describe Graham Turner, I could think of no better description than the current father of leisure travel in Australia. What Graham doesn’t know about the sector and the travel habits of Australians is seriously not worth knowing. I would recommend to anyone thinking about investing in Flight Centre to take the time to read back through Flight Centre’s announcements for Graham’s commentary on past world events such as the SARS epidemic, terrorist attacks and currency fluctuations. His reading of the impact on travel behaviour over the years has been unquestionably accurate. I see no reason to not follow his reading of the market again this time. Furthermore as Graham still owns around 15% of the company he founded over 30 years ago, his actions are definitely tied into the best interest of all shareholders.
- The current events leading to the downgrade are all short term in nature and are not specifically related to Flight Centre. The downgrade is primarily due to:
- A short term drop in traveller sentiment from the upcoming Australian election and the UK’s Brexit referendum.
- US travel numbers have declined in response to the Zika virus affecting popular destinations.
- Heavy and ultimately unsustainable discounting of international fares by carriers means that although Flight Centre’s TTV (total transaction value) will be up by around $1.6 billion on the previous year, it will fail to activate ‘override’ sales targets which would see Flight Centre receive higher commissions.
- Higher expenditure to enable future expansion.
- Importantly the downgrade is not due to the depreciation of the Australian dollar or loss of market share to online competitors.
This has been a major concern for many analysts. Many contend that bricks-and-mortar travel agencies are a relic of the past. While Graham Turner concedes domestic travellers do book online for short trips, he goes on to comment that the internet has been around for more than 20 years, during which time overseas travellers with more expensive and complex trips as a whole still prefer to deal with a travel agent.
- Dividend Yield
While a downgrade has been forecast, it is important to remember it is essentially for a flat performance year on year. This means that the dividend is more than likely to be maintained at 97 cents for the second half.
- Current Valuation
For a company whose historical ROE (return on equity) sits above 20, with a dividend yield of 4.7% fully franked and approx. $400 million cash in the bank, the current PE ratio of 12 is inexpensive by most standards.
Investors who are able to follow in the footsteps of Rudyard Kipling and maintain their heads while all around them are losing theirs will go a long way to achieving their desired results in the stock market.
While a profit downgrade is rarely welcomed it often presents opportunities. As I have outlined above the current situation faced by Flight Centre appears both temporary in nature and most importantly not of its own making. Personally I remain poised to take advantage of this opportunity, particularly if the share price heads below $30.