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Short sellers sometimes get a call wrong, and that’s true of Flight Centre.

In early January last year, shares of Flight Centre Limited (FLT) were trading around $15, with a short interest of 9.65%. By 25 July 2013, the short interest was 12.64%, placing the company at number 5 on the list of the Top Ten Shorted Stocks.  But shares of FLT have been in takeoff mode for quite some time, as is evidenced by its chart:

The reasons short sellers target a stock is not always clear, but in the case of Flight Centre it might have been its business model (Flight Centre has been on the top 10 shorted list for over two years).

Flight Centre began operating in the mid 1990’s when brick and mortar travel agencies were threatened by newly emerging online travel booking services.  Flight Centre quickly took on a “blended” model, adding online booking capability to its business.

Blended or multi-distribution networks can be problematic (US retailing giant Best Buy has experienced similar difficulties).  The costs of brick and mortar locations are one of its major disadvantages.

If the shorts concerns are valid one would expect there might be superior performance from travel operators that operate exclusively online, like Wotif.com Holdings Ltd (WTJ) with a current share price of $4.90 and Webjet Limited (WEB) trading at $4.60.

Let’s look at the year over year share price gains of the two, compared to the XDJ Consumer Discretionary Index, the sector in which all three operate.  Here is the chart:

While the share price of both companies is positive year over year, neither comes close to matching the outperformance of FLT when compared to the Consumer Discretionary Index.  Now let’s look at some valuation and performance metrics for all three companies. 

Company (Code)

Mrkt Cap

P/E

P/CF

P/EG (5 Yr Expected)

2 Yr Earnings Growth Forecast

Operating Margin

Profit Margin

ROE

Flight Centre (FLT)

$4.4b

20.65

16.7

1.64

14.2%

10.3%

14.2%

25.4%

Wotif.com (WTF)

$1.04b

18.76

17.3

4.53

1.3%

52.9%

40.7%

59.5%

Webjet (WEB)

$365m

23.79

23.8

1.36

15.6%

29.4%

21.9%

28.6%

 

Despite its incredible run-up, no figure in the table above suggests Flight Centre is overvalued; nor does anything suggest that online only businesses produces better returns than a blended model.  Based on P/Es, none of these stocks look cheap, but FLT and WEB do not appear wildly expensive either. 

We ignored the traditional P/B ratio due to the difference in the asset base of the companies and looked instead at the Price to Cash Flow (P/CF) metric.  High P/CF ratios are often a sign a company is not generating enough cash flow to justify the stock price.  As you can see, FLT has the lowest P/CF of the three.  Again, the P/CF is not cheap but neither is it dramatically overvalued.  Given the overhead costs of Flight Centre’s brick and mortar locations one would expect margins to be lower than its online only counterparts, and they are.  However, the margins compare very favorably to other ASX stocks working towards multi-channel distribution with both retail and online presence. Myer Holdings (MYR) has a trailing twelve month operating margin of 8.32% and a profit margin of 5.1%.

The company that stands out based on these numbers is Wotif.com.  Its valuation seems reasonable and its past performance in margins and return on equity are solid, but its growth prospects appear weak.  Webjet, on the other hand, seems to have better days ahead and surprisingly enough, so does Flight Centre with an attractive 5 year expected P/EG and a solid 2 year earnings growth forecast.  Of course, the problem with earnings growth forecasts is they’re based on analyst estimates.  So what do analysts say?

Four major firms have BUY, OVERWEIGHT, or OUTPEFORM recommendations on FLT.  The company reported solid 2013 Half Year results in February of 2013 showing a 13% increase in NPAT (net profit after tax).  Analysts note that since that time FLT has raised its forward guidance not once, but twice. UBS, Deutsche Bank, Macquarie, and Citi all have NEUTRAL or HOLD recommendations on FLT but all four raised target prices following the latest earnings forecast upgrade.  Analysts also like the company’s deeper penetration into the corporate market, now accounting for 40% of the company’s business; and its global scope.  FLT operates over 2500 stores and offers a full range of travel services from airfare to hotel to car rentals and insurance.  The company has a presence in 11 countries, including Australia, New Zealand, the UK and the US, Canada, South Africa, the UAE, India, Singapore, Hong Kong, and China.

As a small cap Webjet does not command the breadth of analyst coverage, but UBS has a BUY recommendation while Credit Suisse, JP Morgan Chase, CIMB Securities, and BA-Merrill Lynch are NEUTRAL or HOLD.  There is some concern in the travel industry the declining AUD might impact travel.  Webjet’s share price saw a steep decline around the time the Aussie dollar began to fall and UBS noted the substantial profit contribution from international travel as a reason for the drop.  Here is the company’s one year price chart:

Webjet had a successful capital raise in late 2012 and is now investing in IT upgrades. The company recently acquired Australia based competitor Zuji which extends the Webjet’s presence into Hong Kong and Singapore.  Webjet reported 2013 Half Year results on 02 July and showed substantial improvements after one-off charges.  Costs dropped 8.9% while NPAT increased 23.9%.

Although its share price is still up about 20% year over year, Wotif.com (WTF) gets mixed reviews from analysts.  First, here’s its yearly chart;

In February this year WTF released its Half Year results, showing a 1% drop in total revenue and a 5% drop in NPAT.  The company appointed a new Managing Director who conducted a strategic review, the results of which were released on 24 June.  The bad news was a downgrade to forecasted profit. 

Citi maintained its SELL recommendation on WTF and dropped its price target, as did UBS while maintaining its UNDERPERFORM rating.  Both cited concerns over capital expenditures, most of which are going towards technology enhancements.  BA-Merrill Lynch also has an UNDERPEFORM recommendation on WTF but in their opinion the company is under investing in IT.  UBS, Deutsche Bank, Macquarie, and JP Morgan all have NEUTRAL or HOLD ratings coupled with lowered price targets.  The sole exception is CIMB Securities with an OUTPERFORM recommendation.  CIMB is anticipating a slowdown in the Australian economy and has targeted WTF as one of a “select” group of companies with “extras” to provide a counter balance to the downturn.  In WTF’s case CIMB feels the increased commission structure and the expectation of new revenue streams such as display advertising provide those extras.

Although Flight Centre has been one of the hottest ASX stocks of the year, another travel company that went public in late 2010 actually outpaced it.  The company is Corporate Travel Management (CTD) and here is a share price chart since its introduction to the ASX:

CTD is up over 175% since it began trading and its year over year performance to date shows a 120% increase, slightly ahead of Flight Centre’s 110%.  As its name implies, CTD caters to the corporate market with a full range of travel services.  With a market cap of $358 million it is similar in size to Webjet with a hefty P/E ratio of 22.29 compared to WEB’s 23.79.  However, CTD has a two year earnings growth forecast of 19.5% along with a dividend growth forecast of 16.6%.  Right now CTD has only 9% share of the Australian corporate travel market with 15 ASX 100 companies among the 1000 clients it serves.  The companies Half Year 2013 results saw a 36.5% revenue increase along with a 22.7% increase in NPAT.

In mid 2012 CTD acquired US based R&A Travel and is further expanding its reach into the US with the recent acquisition of TravelCorps.  Corporate Travel Management claims to provide personalised business customer service through its best in class market technology.  According to the company, a recent survey conducted on Australian clients showed a customer satisfaction rate of 98%.  This company also has a blended business model with seven brick and mortar locations throughout Australia along with online booking services.  Although it serves a single market, if you are on the hunt for another potential Flight Centre, Corporate Travel Management deserves a spot on your watch list.  The company has solid experience with Australia’s premier oil, gas, and resources companies and that bodes well for success in the US.

Small cap ($187m) Jetset Travelworld LTD (JET) is another company with a blended approach but with a slightly different twist.  The brick and mortar locations are franchise operations.  In theory the overhead savings should benefit the parent company but the share price performance since the 2008 merger with Qantas has been lacklustre.  Here is the chart:

Jetset arrived on the ASX in 2002 following a series of expansions and acquisitions.  Following the Qantas move another merger in 2010 left the company with a bit of a hodge-podge of travel brands.  On 22 July 2013 the company announced it would consolidate its brands into a single brand called helloworld.  JET plans to enter into a long term strategic partnership with US based Orbitz Travel to operate the online platform.  Existing franchisees will have a choice of three different retail models. 

Following the announcement analysts at JP Morgan maintained their UNDERPERFORM rating with the cryptic caution to investors of the risk “this brand won’t fly.”  The company has a trailing twelve month (TTM) P/E of 60.01 but advocates of the stock cite the Forward P/E (2014) of a mere 7.08.  However, as you know, a forward P/E is based on estimates and those estimates assume the new brand “will fly.” 

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