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Are Flight Centre Travel Group Ltd shares ridiculously cheap?

Credit: Jaan

Flight Centre Travel Group Ltd (ASX: FLT) shares have been in hot water during the past three months.

Source: Google Finance

Source: Google Finance

Are Flight Centre shares ridiculously cheap?

With interest rates stuck at record lows and the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) above its long-term valuation average, many investors will ask if now is the right time to buy Flight Centre shares.

Firstly, I think it’s important to understand the company’s most recent trading update (from May 23). In the update, the company said profit is likely to be below initial guidance despite sales being tipped to grow to record levels.

When sales rise and profits remain flat or fall the culprit must be higher costs. Flight Centre said uncertainty in some markets, key investments, weak US leisure results and airfare price wars were to blame.

A price war in the airline industry is a particular concern because 80% of Flight Centre’s transacted volume comes from airfares in major markets. Unfortunately, airfare competition may get worse before its gets better, especially if oil prices rise.

The underlying Flight Centre business, however, appears to be very strong and its track record for dividend and earnings per share growth is enviable.

At its current price of $31.66, investors may be able to buy with a healthy margin of safety provided the company can maintain its margins and pay a dividend of around $1.50.

Looking at consensus analyst valuations, however, suggests otherwise. The average fair value estimate is around $36, according to Dow Jones Newswires.

Foolish takeaway

Flight Centre has proven to be an excellent business for a very long time. Indeed, despite the rise of digital marketplaces and easy-to-use comparison sites, it has grown profits locally and abroad.

If the company can continue to keep its profit margins in check and regain profit growth over the medium-term, the company looks cheap in this Fool’s opinion. However, it’s not without risk.

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Motley Fool Contributor Owen Raszkiewicz has a financial interest in Flight Centre shares. You can follow Owen 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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