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Why Webjet Limited shares are going gangbusters today

Shares in online travel business Webjet Limited (ASX: WEB) have climbed around 4% to $11 today and have now climbed around 157% over just the past year.

The catalyst for the latest share price surge is probably the admission of the company to the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) index of Australia’s leading companies. The stock effectively joined the index during yesterday’s interrupted trading session and is probably being bought today by passive fund managers and other investment service providers obliged to track indexes as part of their investing mandates.

Another addition to the S&P/ASX 200 Index as of yesterday is data-centre businsess Nextdc Ltd (ASX: NXT). Today its shares are up more than 6% to a record high of $4.35 as it is probably also being bought by investors obliged to own stocks within the benchmark S&P/ASX 200 Index.

Of course joining an index is no guarantee of future performance, rather it’s recognition of past performance and for forward-looking investors it’s only the future that counts.

Webjet’s future remains leveraged to demand for its travel booking services across the individual and business-to-business (B2B) space.

Many consumers still prefer to shop for special offers on flights and holiday packages combined via aggregator sites like Webjet as it’s arguably more convenient and offers reasonable value for money. In fact Webjet has grown the total transaction value of its bookings for 27 consecutive quarters now, with its Zuji international operation growing especially strongly.

This is an impressive achievement considering the competitive environment includes the likes of Flight Centre Travel Group Ltd (ASX: FLT), Expedia, Wotif and lastminute.com. Even B2B focused travel agency Corporate Travel Management Ltd (ASX: CTD) is moving into the consumer travel space with its deal to promote travel bookings on Flybuys loyalty reward points.

However, Webjet also has B2B operations performing well, after it acquired the Europe and Middle East focused Sun Hotels and Lots of Hotels travel booking sites respectively. The corporate business effectively offers the digital provision of hotel rooms to online travel partners that now include iconic UK travel agency Thomas Cook.

This looks a mutually beneficial deal as the more hotels a platform has the greater its worth to travel partners, while the hotels themselves are likely to see stronger occupancy rates presumably in return for fees or commissions as bookings are made.

Outlook

Webjet is well-managed and for FY17 is forecasting that its business to consumer division will grow EBITDA above its five-year compound annual growth rate of 10%, with the B2B’s operating EBITDA forecast to grow ahead of its five-year compound annual growth rate of 30%.

It needs to book another strong year of earnings growth given that at $11 the shares trade on around 28x analysts’ estimates for 39 cents in forward earnings per share for FY17. This is the kind of valuation usually reserved for hot tech stocks and looks expensive given Webjet remains in a ferociously competitive sector, with low barriers to entry.

I thought the shares were expensive when I bought some at $7.23 just a couple of months ago, although my holding is so small it’s largely immaterial. For that reason I’ll hold onto them for now, however, if I held a larger parcel I would probably look to sell a small part of the holding.

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Tom Richardson owns shares of Webjet Ltd.

You can find Tom on Twitter @tommyr345

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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