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Why I’m giving Flight Centre Travel Group Ltd (ASX:FLT) shares a miss for now

Credit: Joits

Flight Centre Travel Group Ltd (ASX: FLT) is involved in the selling of international and domestic travel. An ASX success story, the Flight Centre share price has increased from $17 in 2008 to its current price of $63.

This capital growth can be attributed to its historically strong financial performance. Since 2009, net profit has grown from $38.2 million to $230.8 million as at 30 June 2017. In the same time period, sales per share have increased from $16.84 to $25.13.

When we look a little closer, effective profit allocation comes under fire. In the past 10 years, Flight Centre has earned $20.09 per share, whilst paying out $10.93 in fully franked dividends.

This means that Flight Centre has retained $9.16 per share in profits whilst only adding $7.52 to Net Tangible Assets. Despite 271% capital growth and an additional 56% in returns via dividends over the last decade, inefficient allocation of retained profits are a potential warning sign for  investors.

Conversely, if you believe in management’s ability to allocate profits moving forward, Flight Centre’s earnings projections (according to analysts) demand attention. By 2020, Flight centre is expected to increase earnings per share by 36% and has a forward P/E ratio of 20.

Investors may look past this higher price tag because of Flight Centre’s strong financial history. However, travel is one of the first things to suffer in a down market and with a premium already built into Flight Centre’s current share price, the margin for error in this stock is much lower.

If you’re not convinced on Flight Centre, Qantas Airways Limited (ASX: QAN) has a forward P/E ratio of 10.2 and will ride the same market developments that Flight Centre does.

Alternatively, if you’re looking for more defensive investments, Woolworths Group Ltd (ASX: WOW) or Wesfarmers Limited (ASX: WES) may be more appropriate for you.

Foolish takeaway

Whilst a fundamentally strong company, I believe Flight Centre is too expensive given its earnings susceptibility in a bear market. I will sit on the sidelines for this one.

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Motley Fool contributor Matt Breen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited and Wesfarmers Limited. 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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