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Why UBS upgraded Flight Centre Travel Group Ltd to a buy

The share price of Flight Centre Travel Group Ltd (ASX: FLT) has literally taken off this morning and is the best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).

The 6.3% surge in the stock to a near four-year high of $49.79 comes on the back of an upgrade by UBS with the broker convinced the travel agent has enough in the tank to soar even higher.

The bullish assessment that has prompted the broker to lift its recommendation on the stock to “buy” from “neutral” is driven by growing confidence in management’s ability to hit its three-to-five-year pre-tax profit targets.

The return of more rational competition, operating efficiencies achieved by management and the growth of its online business that is now profitable are some of the factors behind the broker’s decision to lift Flight Centre’s earnings per share forecasts from FY18 to FY21 by 5%-10%.

Fight Centre is targeting a 7% compound annual growth rate (CAGR) for total transaction value (TTV) and a 2% pre-tax margin. UBS is factoring in a 6% CAGR and 1.9% margin, so this leaves an opportunity for another round of upgrades if management can deliver on its promises.

“On an ex-cash basis, Flight Centre trades at a circa 15% discount to the market, offering circa 8% EPS CAGR (FY18-21e) with upside; we believe the market is undervaluing the medium-term opportunity available,” said UBS, which has lifted its price target on the stock to $53.60 from $47.50.

The latest upgrades put UBS’ earnings forecasts ahead of consensus by between 4% and 7%. What this means is that the stock could be cum-upgrade if UBS is on the money.

The next opportunity for a re-rating will come at its half year results on February 22 and it is worth noting that Flight Centre has been strongly outperforming its peers and the market with a one-year gain of nearly 60%.

In contrast, Corporate Travel Management Ltd (ASX: CTD) is up around 15.5% and Webjet Limited (ASX: WEB) is 5% in the red over the same period, while the S&P/ASX 200 index has recorded a 5.6% gain.

If you are a value investor, I would be more inclined to bet on Webjet given its bigger discount and greater leverage to online sales.

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Motley Fool contributor Brendon Lau has no position in any of the stocks 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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