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Why are short positions in Webjet Limited shares rising?

Shares in online travel business Webjet Limited (ASX: WEB) have not had a positive start to 2018 with the price of its shares down 4.1% to $10.00. The last several weeks have been volatile for Webjet after it disappointed the market when it announced its earnings guidance for FY18 on November 22. The company projects FY18 EBITDA to be at $80 million which represents a 56.9% increase on the EBITDA from continuing operations in the prior period of $51 million. Management noted that pro forma EBITDA would have been at $89 million with a full year of contribution from JacTravel which was acquired in September. Webjet also expects a strong rise in Total Transaction Value from $1.9 billion to $3 billion in FY18.

Short attack

Webjet’s earnings guidance on November 22 saw a sharp 11.6% sell off in the company’s share price as it’s guidance failed to meet market expectations. Short interest in the company has soared from 1.26% on November 22 to 5.85% as at January 8. This includes a remarkable trading session on December 13, when 91.82% of the 1,021,574 shares sold were short sales. The recent trading activity demonstrates the risk in high PE ratio companies when they fail to meet expectations. However, in my view the long term thesis on the company is still sound and FY18 guidance does include one-off costs of $5.6 million.

Peer valuation

Morningstar projects Webjet to earn 53.1 cents in FY18 which means the company’s trades at a forward P/E of approximately 19. I think this represents a more attractive valuation than some of its peers. Fellow travel business Flight Centre Travel Group Ltd (ASX: FLT) is growing at a significantly slower rate than Webjet but currently trades at around 18 times forward earnings. Another major rival in Corporate Travel Management Ltd (ASX: CTD) is also projected to grow at a slower pace than Webjet but trades on a forward P/E of approximately 26. The shorts are in control currently, but a high short interest does represent stored buying power. Webjet reports its half yearly earnings on February 22 and a result exceeding market expectations could see a large short squeeze.

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Motley Fool Contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Webjet Ltd. 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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