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There seems to be little logic in buying travel companies in our economic malaise, but two stocks seem to be defying the downturn – so far at least. Flight Centre and Wotif.com appear on broker lists as stocks of merit, so we decided to dig a little deeper.

Paul Shepherd of RBS Morgans has a Buy rating on Flight Centre (FLT) and a Hold recommendation on Wotif.com Holdings. “In our view, the quantum of Flight Centre’s profit growth in full-year 2011 is a very solid outcome, particularly in light of a weak retail environment and the number of natural disasters over the period,” he notes. “The company has further diversified its geographical source of income, while increasing its penetration of the corporate market. We also believe that providing full-year 2012 guidance for 10 per cent growth at this early point demonstrates management’s confidence.”

Travel company Flight Centre offer retail packages as well as wholesale packages for commercial interests. They operate both in brick and mortar locations as well as online and have a solid international reach.

It does not take an advanced degree in economics or finance to realise, however, that in the face of tough economic times, travel is one of the first discretionary items to suffer.  Even business travel is scaled back to the essential.  

As indicated above, Paul Shepherd noted FLT’s recent profit growth as evidence of a solid company navigating successfully in very challenging economic conditions.  He is not alone in his view.  Courtesy of Thompson/Reuters First Call, we know that of the fourteen financial analysts that cover FLT, five assign a Strong Buy Rating; five have a Buy Rating; and four have a Hold recommendation.  No one in the analyst community feels this company will underperform and there are no sell recommendations.

Analyst opinions’ are a good starting point for researching shares for potential investments, but intelligent investors dig deeper to form their own opinions.  In the case of FLT, their recent annual financial statements  boasts an 18.6% profit increase, year on year.  But when you look into the actual statements, you will see that this figure represents profit before “abnormals” that included a 30 million dollar goodwill impairment adjustment relating to its 2008 acquisition of US based Liberty Travel Group.  

Its 2011 Net Profit after Tax was actually flat – a 1% decrease from 139,868 billion to 139,810 billion.  This is still an impressive performance considering the substantial headwinds the company faced in FY 2011.  

Australian online travel operator Wotif.com, on the other hand, did not fare so well. Shepherd noted: “The online travel and accommodation site reported a 3.8 per cent fall in net profit after tax to $51 million for full-year 2011. It was a tough year for the company. Weak domestic travel demand was due to a strong Australian dollar providing an incentive to travel overseas. Expectations of a lower growth profile moving forward mean the multiples applied to this company need to be adjusted accordingly.”

Other analysts agree with Shephard. According to Thompson/Reuters First Call – 1 analyst currently has a Strong Buy recommendation on Wotif.com; 4 analysts have Buy recommendations; 4 underperform ratings; and 1 Sell recommendation.

If you compare share price movement of the two companies, it would appear some market participants agree with the analysts.  Here is a one month price movement chart:

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WTF took a substantial hit when they announced their weaker than expected profits and less than rosy outlook on 23 August, 2011.  However, prior to the latest round of worry regarding the European debt crisis towards the end of the month, the share price was beginning to recover. Wotif has a lengthy list of travel websites and also qualifies as an international operator.

The broader diversification in the business model of Flight Centre, however, would appear to make it a safer play.  They have both online and store centers and work with both businesses and consumers.  

Let’s look at some hard year over year performance numbers for both companies, dating back to the onset of the GFC.

Year over Year Performance – FLT

FLTFY 2007FY 2008FY 2009FY 2010FY 2011
Revenue (in millions)1,120.81,410.31,677.71,768.51,822.3
Net Profit After Tax (in millions)120.8143.238.2139.9139.8
Earnings per Share (in cents, pre abs)96.6146.598138.8170.8
Dividends per Share (in cents)668697084

 

You can see something strange happened in 2009.  Despite a healthy increase in overall revenue, FLT showed a significant drop in NPAT, EPS, and DPS.  We visit the 2009 annual report to learn the loss was due to a one-off asset impairment charge of around 59 million dollars.  

The loss was attributable to the acquisition of US based Liberty Travel Group in that year and subsequent tax losses.  This makes it difficult to get a sense of how well the company weathered the onset of the GFC.  However, their performance improved dramatically during FY 2010.  Note that the earnings per share numbers represent earnings before abnormals.

Year over Year Performance – WTF

WTFFY 2007FY 2008FY 2009FY 2010FY 2011
Revenue (in millions)62.389118.8133.2134.2
Net Profit After Tax (in millions)26.434.543.552.951
Earnings per Share (in cents, pre abs)12.816.620.72524
Dividends per Share (in cents)131517.521.522

 

This performance picture is both impressive and puzzling.  You can see that WTF continued its growth during the GFC yet 2011 proved too challenging.  Some might see the circumstances in 2011 as somewhat of a perfect storm for their business model.  As consumer sentiment and spending declined, so did domestic travel.  The rising Australian dollar led affluent Australian investors to look for more overseas travel opportunities.

Management actually cite the strength of the dollar as the principal cause of their financial slowdown.  However, despite that fact, they still declared an impressive 22 cents per share dividend.  

For both WTF and FLT, the future depends on some semblance of continued growth in the Asia-Pacific region.  Remember that WTF is more dependent on the Australian consumer and the home market than Flight Centre.

In summary, neither company is likely to rally significantly over the short term, so there’s no rush to buy shares before it’s too late. However these stocks may be interesting to watch, particularly if share prices retreat further. Buying cylical stocks like travel businesses prior to a strong economic recovery can be a lucrative strategy, the question for investors is how long will that be – and indeed, it could be still some years from now.

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