No business on the S&P / ASX200 (ASX: XJO) divides the bulls and bears as much as Flight Centre Travel Group Ltd (ASX: FLT).
It currently has around 6.6% of its shares shorted despite the stock already falling 31% over the past 6 months, which suggests some investors are confident we'll see more falls ahead.
So let's take a look at a few factors feeding the bulls and bears:
Bears
- Argue that Flight Centre's bricks and mortar travel store model is outdated (as high-street foot traffic) disappears and an unnecessary cost given the rise of the internet and online travel bookings
- Argue that Flight Centre will face increasing competition from digital rivals including powerful travel giants with strong network effects such as Booking.com, Expedia and Trivago
- Argue that the travel industry is vulnerable to a downturn especially in Australia if house prices fall as consumers feel less wealthy
- Flight Centre's significant UK operations are vulnerable to a Brexit-induced collapse in sales and profits, Flight Centre has already flagged the potential for Brexit to impact corporate travel
Bulls
- Argue Flight Centre's store model is still profitable and as such it makes sense to still expand it at profitable rates of return. The stores are cheap to run with little inventory requirements (just desks / computers, etc) compared to an apparel retailer for example. The store network also aids profitability via cross and up-selling.
- Argue Flight Centre is a digital business too and can enjoy the higher profit margins associated with providing online travel services.
- Argue Flight Centre has a rock solid long-term history of total transaction value, revenue, dividend and earnings per share growth. This has been achieved organically and via a series of smaller bolt-on acquisitions.
- Argue that despite the acquisitions, Flight Centre has a fortress like balance sheet with just $35 million in debt and $553 million in general cash and investments
- Flight Centre in its core Australian market has a strong competitive position thanks to its scale and booking power. It can therefore make better profit margins than rivals by negotiating better deals with airlines, hotels, insurers and other travel services providers.
- It has some competition in Australia such as Helloworld Ltd (ASX: HLO), Webjet Limited (ASX: WEB) and Corporate Travel Management Ltd (ASX: CTD), but it's hardly ferocious and does not have the scale advantages of Flight Centre in a large and continually growing global travel market
- Flight Centre is guiding for profit before tax growth of 7% for H1 FY 2019, trades on 17x trailing earnings and offers a 3.8% trailing dividend yield on a lowish payout ratio of around 64%
For me Flight Centre looks an investment grade business and the valuation is currently reasonable based on its outlook as such I'm interested in picking up some shares when trading rules permit.
Moreover, I'll be especially interested if we a pullback in the share price on the back of investor jitters ahead of its February report.
