S&P/ASX 200 Index (ASX: XJO) travel shares took some of the steepest falls in the early months of the global pandemic as domestic and international travel ground to a halt.
The Qantas Airways Limited (ASX: QAN) share price, for example, cratered 64% from 21 February through to 20 March 2020.
Travel agencies were smashed too, as witnessed by the 75% fall in the Flight Centre Travel Group Ltd (ASX: FLT) during that same tumultuous month.
Then there's Webjet Limited (ASX: WEB), whose shares dropped 72%.
And the Corporate Travel Management Ltd (ASX: CTD) share price, which fell 75% from 17 January through to 20 March 2020.
Ouch.
ASX 200 travel shares bounce back on recovery
As you'd expect, ASX 200 travel shares were also some of the strongest beneficiaries of the gradual recovery in domestic and international travel.
First, they leapt higher on news of the vaccines in November 2020. And since then they've continued to march higher, albeit with significant volatility.
Over the past 12 months, the Qantas share price has gained 17%; the Webjet share price is up 19%; Corporate Travel Management's shares have gained 32%; and the Flight Centre share price is up 34%.
For some context, the ASX 200 is trading right about the same level it was at 12 months ago.
Are these companies fairly valued now?
With those gains behind them, are ASX 200 travel shares already fully valued?
For some insight into that question, we turn to Neil Margolis, lead portfolio manager at Merlon Capital Partners, courtesy of the Australian Financial Review.
According to Margolis:
While pent-up demand might result in super-profits for travel stocks, most of this is already reflected in the share prices. To illustrate this, the trio of booking agencies, Flight Centre, Corporate Travel and Webjet have a combined market value of over $10 billion, or 30 times consensus earnings for 2023. This compares to a combined value of only $8 billion before the pandemic, when actual earnings were 20% higher.
Remember the massive share price losses we covered up top? Margolis highlights how that hit the valuations of these top ASX 200 travel shares.
"To illustrate extreme market sentiment at work, they were valued at a mere $2 billion during the pandemic lows, which was when we participated in the Flight Centre and Webjet capital raisings."
But he cautions about investing in stocks like ASX 200 travel shares based on unsustainable earnings surges.
"While they might surprise on earnings, we only pay for sustainable earnings – not peak earnings – and these companies also face risks from online competition," he said.
As for Qantas?
According to Margolis (quoted by the AFR):
We do own Qantas after investing during the Sydney lockdowns last year, and while it has rallied strongly, the market valuation is still (just) below pre-pandemic levels and there is potential for permanent market share gains and cost efficiencies.
While we recognise Qantas' strong domestic and loyalty market position, we do remain sceptical that the airline industry will ever change from being capital intensive and cut-throat.
