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Why Flight Centre could send Webjet’s share price sinking lower

The disappointing earnings update that sent the Flight Centre Travel Group Ltd (ASX: FLT) share price nose diving by 11% on Wednesday could also send shares in its rival tanking in the near-term.

The Webjet Limited (ASX: WEB) share price is at risk of underperforming over the next two weeks because of the dismal news from Flight Centre, according to Morgan Stanley.

That isn’t what Webjet shareholders want to hear. The stock is already down close to 30% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 8%.

In contrast, the Flight Centre share price fell 21% while the Corporate Travel Management Ltd (ASX: CTD) share price crashed by over 40%.

What’s bad for the goose is bad for the gander

“Competitor Flight Centre announced 65% yoy growth in brand OTA sales and 140% growth in Aunt Betty and BYO jet brands in 1Q20 for blended growth of 98%, delivering A$250m TTV in seasonally softer 1Q vs FLT’s A$1.3bn in FY19 and WEB’s A$1.4bn,” said Morgan Stanley.

“This uplift follows the removal of booking fees in late FY19. FLT also pointed to just 8% customer cross over with its retail network.

“We estimate WEB’s booking fees starting at $34.90 make up a large majority of B2C revenue (A$151m in FY19) and converts at high incremental margins (B2C divisional margin 40.4% in FY19).”

The broker suspects the market will catch on to the bad news and it believes there is an 80% plus chance that the Webjet share price will fall in the very near-term.

Buying opportunity – just not yet

The operating environment for travel agents is also looking challenging in my view and is one of the reasons why I sold out of Webjet recently.

Falling consumer confidence, the weak Australian dollar that makes overseas travel more expensive for local travellers and the reluctance of consumers to make large financial commitments are some of the headwinds buffeting the sector.

The collapse of UK-based Thomas Cook is another drag on Webjet, which had to take a €27 million ($44 million) write-down to earnings.

While I like the longer-term prospects for Webjet and I think the stock is starting to look attractively priced, I am reluctant to try catching a falling knife – particularly when I think I can buy back into the stock later at a cheaper price.

Interestingly, Morgan Stanley has an “equal-weight” recommendation on the stock although its price target of $12.40 per share suggests around a 25% upside for the stock.

Bargain hunters might want to wait for the dust to settle before jumping on this opportunity.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

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.