The Webjet Limited (ASX: WEB) share price is trading marginally higher at the time of writing, however, it has tumbled 28% from its all-time high of $17.73 in August 2018.
Webjet Limited operates leading Business to Consumer (B2C) travel brand Webjet, as well as a range of other brands in both the B2C and Business to Business (B2B) travel booking industry. Along with fellow travel booking companies Corporate Travel Management Ltd (ASX: CTD) and Flight Centre Travel Group Ltd (ASX: FLT), Webjet has been a very strong performer over the past decade, rising in value by approximately 1,100% excluding dividends.
Can Webjet continue to outperform the ASX 200?
Valuation
Webjet shares currently trade at 21x estimated forward earnings. This looks quite expensive considering the market currently trades at around 16/17x earnings. However, Webjet is a high-growth business and investors should look at whether the market is over or underpaying for this growth.
Webjet's management expects to grow earnings by 26% in FY19, implying a PEG ratio of less than 1. So long as the company can meet management's expectations, it appears that the stock may be undervalued.
Potential
Webjet has a long runway for growth! The travel industry is highly fragmented. This means that the industry isn't dominated by one or two large players who have a lot of pricing power. Webjet's FY18 EBITDA margin was a healthy 30%.
It also provides great optionality for companies looking to make acquisitions. On the 22nd of November 2018, Webjet completed the acquisition of DOTW Holdings Ltd (Destinations of the World). This was followed by a $153 million entitlement offer on the 27th of November 2018. The DOTW acquisition will allow Webjet to supplement its strong B2C business, with greater scale and a broader geographic footprint in the B2B market.
The combination of strategic acquisitions and high margins means that the company can target profitable growth for the foreseeable future.
Webjet currently has a dividend yield of 1.6% (or 2.3% grossed up). As earnings grow, the company could raise its dividend over time. The company's 2018 dividend grew 14% over the 2017 dividend.
Foolish takeaway
Webjet Limited is a well-run company, growing strongly through smart acquisitions and organic growth. I would suggest that the recent pullback the share price represents an opportunity for investors to grab hold of a quality company at a reasonable price. Alternatively, investors could wait to review the company's interim 2019 results on the 21st of February 2019.
