Yesterday I wrote a brief article about one of Australia's most popular dividend companies, using fund manager Peter Lynch's method of comparing share prices and earnings to evaluate whether a company is cheap or expensive.
I thought it would also be interesting to look at a more out-of-favour business, Flight Centre Travel Group Ltd (ASX: FLT). Here I used statutory earnings per share:
By and large we can see that Flight Centre has been more or less fairly priced for most of the last 10 years, although it was seemingly overpriced in 2013 and 2014, when the share price (blue bar) shot far above earnings (orange bar). You can see a corresponding increase in the company's Price to Earnings (P/E) ratio (grey bar) to almost 25 times earnings, from a long term average of ~15. The large gap in 2009 was due to one-off impairments, which halved profits. On an underlying basis, prices were more normal.
The current share price of $28 has diverged far from last year's earnings, which would ordinarily suggest that the company is cheap. However, Flight Centre's recent first half results of 73 cents per share were also substantially below the 116 cents recorded previously. While the company is guiding for a substantially stronger second half, the risk is that investors following the above method buy the company because it appears cheap, only to get hit if the second half fails to deliver.
Price is what you pay, value is what you get
Based on this method, Flight Centre shares don't appear to be a standout bargain in terms of price. However, in terms of value (the business), Flight Centre continues to expand internationally and has reasonable prospects in the corporate and managed travel sectors. As we saw with Wesfarmers Ltd (ASX: WES), even shareholders who bought when the company was 'overpriced' (according to this method) saw share prices grow 5% per annum plus dividends between 2010 and 2016.
So, while the above chart could be a useful quick-and-dirty way of determining whether a company's shares are expensive or cheap compared to its historical levels, it won't tell you which shares are a good investing opportunity.
