MENU

Flight Centre Travel Group Ltd (ASX:FLT) shows how a profit downgrade can be an upgrade

The share price of Flight Centre Travel Group Ltd (ASX: FLT) has recovered some of its devastating loss suffered on Monday as brokers used management’s profit downgrade as an opportunity to upgrade the stock.

Shares in the travel agency surged 4% to $47.91 on Tuesday while shares in Webjet Limited (ASX: WEB) added 0.6% to $13.64, Corporate Travel Management Ltd (ASX: CTD) gained 3% to $28.44 and Qantas Airways Limited (ASX: QAN) fell 1.8% to $5.55.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index lost 1.1%.

However, shares in Flight Centre are still in the doldrums given its 10% crash on Monday when management said at its annual general meeting (AGM) that first-half profit before tax would range between $140 million and $150 million, which represents a gain of 0.4% to 7.6% over the same period last year.

Full year pre-tax profit is now expected to come in at $390 million to $420 million or 1.4% to 9.2% ahead of FY18.

Guidance for the half and full year are below consensus and you can blame the Australian market for the profit downgrade with total transaction value (TTV) inching up modestly but earnings going backwards.

Management is trying to reassure investors that the drag on the local market is temporary, such as the negative media publicity on work conditions. Macquarie Group Ltd (ASX: MQG) is worried, though, that the weakness will stick around for longer given the operational leverage where a small drop in TTV will lead to a large earnings loss due to high non-variable costs.

However, this didn’t stop Macquarie from upgrading its recommendation on Flight Centre to “neutral” from “underperform”.

“Our Underperform was largely predicated on overly optimistic consensus forecasts and an overly generous valuation multiple,” said the broker.

“With an FY19 P/E of now 16x (having reached 25x FY19 EPS pre FY18 result) we suggest valuation is now largely addressed. And with consensus estimates expected to reduce following the guidance update we suggest earnings risk is now more evenly balanced.”

Meanwhile, JP Morgan has also upgraded the stock to “overweight” from “neutral” as it noted that Flight Centre is now the cheapest Australian travel stock on a relative basis to its FY19 price-earnings (P/E) basis.

“FLT is continuing to diversify into corporate and grow earnings offshore, with positive trading seen in FY19 to date in most geographies,” said the broker.

“While the market [on Monday] was likely troubled by FLT highlighting that weaker Australian leisure market is impacting on 1H19, we believe we are simply seeing the residual impact from the Global Distribution System (GDS) upgrade in FY18.”

This upgrade is now complete and the company has a new enterprise bargaining agreement in place with employees, meaning management can return its focus on growth and cost-cutting.

Macquarie has a price target of $47 a share on Flight Centre while JP Morgan is pegging fair value at $63 a share.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. 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 Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.