Better buy: Webjet Limited or Flight Centre Travel Group Ltd?

Online travel agency Webjet Limited (ASX:WEB) reported strong first half FY18 results, with revenues up a whopping 266% on the prior corresponding period to nearly $360 million. A major contributor to this big jump in revenues was JacTravel, a UK-based tour and accommodation supplier which Webjet acquired in September 2017. But even after stripping out the effects of the JacTravel acquisition, underlying revenues were still up an impressive 52% $131.9 million. Reported EBITDA grew 63% to $41 million, with $8.6 million coming from JacTravel, and NPAT was up 25% to $20 million.

But shareholders in Webjet probably feel a little frustrated by how their investment has performed over the past year. The company’s share price is basically back where it started 12 months ago at $11 – but in order to get back to parity investors have had to endure some stomach-churning peaks and troughs.

Over a few short days in late November, shares in Webjet plummeted 22% on the back of a disappointing FY18 earnings forecast. Webjet managed to reverse those losses in February after the release of its 1H18 results, but its shares are again down about 13% since they touched $12.50 in early March. Shares in Webjet still trade at almost 37x earnings, and it’s unlikely that this volatility will disappear any time soon.

Webjet’s main local competitor is the traditional brick-and- mortar travel company Flight Centre Travel Group Ltd (ASX:FLT). It also had a very encouraging first half FY18, with management so inspired by the result that they even upgraded the company’s full year profit guidance.

Flight Centre reported profit before tax (PBT) for the six months ending 31 December 2017 of $113.2 million, an increase of 23.2% on underlying PBT for first half FY17. Total transaction value (TTV), which includes the value of all flight, hotel and other bookings made through Flight Centre, increased by 8.7% to a record $10.16 billion for the period.

Flight Centre was also able to hit its productivity target of 7% growth in TTV per customer. This shows that the company is strengthening its product offering and generating strong sales through good old fashioned customer service. The only negative for the period was contracting margins, but Flight Centre stated that this was expected as the product mix continued to shift towards budget travel alternatives.

Management upgraded their forecast for FY18 PBT to $360 million to $385 million, a modest increase over their original target range of $350 million to $380 million. The market responded in kind, with shares in Flight Centre jumping around 20% in the days following the release of its financial results.

Overall, investors in Flight Centre should be very happy with the company’s share price performance over the past 12 months. They are now sitting on gains of over 80% with nowhere near the same level of share price volatility as Webjet. The company now trades at a little under 22x earnings.

Foolish takeaway:

Personally, I find these two competing companies an interesting litmus test for the broader retail sector. As an increasing amount of pure-play online retailers pop up – like Webjet, Ltd (ASX:KGN), Ltd (ASX:CAR) or REA Group Limited (ASX:REA) – it’s worth considering whether there is still value in a retailer maintaining a physical presence. The recent performance of Flight Centre seems to indicate that many customers still do place a premium on face-to- face customer service, especially when booking package holidays.

Despite Webjet’s continued organic growth and strategic acquisitions it still hasn’t really been able to completely win over the market. Consequently, its share price performance over the past 12 months has been pretty disappointing. Although Webjet does still offer solid growth potential it might not be a great investment for those seeking stable returns.

Flight Centre, on the other hand, has seen its share price grow steadily as it continues to drive productivity by leveraging its customer service model. And it is still cheap relative to Webjet based on their PE ratios. Traditional brick-and- mortar companies like Flight Centre should be a dying breed, but it continues to impress the market with its strong results.

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Motley Fool contributor Rhys Brock owns shares of ltd and REA Group Limited. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Limited, ltd, REA Group Limited, and 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 Scott Phillips.

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