Morgan Stanley reckons you should be wary of Webjet Limited

Here's why the broker cut its rating on Webjet Limited (ASX:WEB) recently.

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At least one sophisticated investor has become more bearish on travel company Webjet Limited (ASX: WEB), with broker Morgan Stanley recently cutting the company to 'underweight'.

According to Fairfax media, the reasons behind their cut include:

  • A large acquisition, JacTravel, that came immediately on the heels of a disagreement with Webjet's auditor related to a prior agreement
  • Lack of transparency in the group's B2B segment
  • JacTravel is a transformative acquisition that will further complicate the business

These are fair concerns, especially the JacTravel acquisition which, at $330 million, is a big piece to chew for the $1.2 billion Webjet.

Not being privy to the full broker note, my assumption would be that Morgan Stanley analysts are concerned that the acquisitions and lack of transparency could lead to either 'low quality' or overstated earnings that may have to be painfully restated at some time in the future.

This is an important consideration, but in my view, it is also important to consider that Webjet is a strong company with a history of generating cash and growing the value of acquired businesses. While there may be concerns regarding the company's treatment of its acquisitions, they don't detract from Webjet's strong balance sheet and history of creating value for shareholders.

Morgan Stanley's latest price target on Webjet is reportedly $11.35 which implies that, despite these concerns, Webjet is 5.7% overpriced. If you take a long term view, as most Foolish readers do, a 5.7% fluctuation in share price either way is meaningless. By this I mean that, fundamentally, either Webjet is a good business and it will be worth a lot more in 10 years time, or it is a bad business and will be worth a lot less.

So far the evidence leans towards the former, and on balance I think shareholders may be best served by giving management the benefit of the doubt and continuing to hold their shares.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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