Wotif.com introduced many of us to the convenience and cost benefits of online travel arrangements back in 2000, with the company going public in 2006. Online Travel Agencies have multiplied in recent years, with US based Expedia.com and Priceline.com increasing competition in Australia.  Wotif.com (WTF) shareholders welcomed the news that the ACCC (Australian Competition and Consumer Commission) approved a takeover bid from Expedia.  However, the share price boost did little to help long-term holders of the stock. Here isthe chart for the company since it began trading on the ASX.

In explaining Wotif’s fall from grace following a roaring post GFC comeback, some analysts point to the substantial difference in technology investment and content updates between the major players and Wotif.  In short, Wotif did not have enough cash to match the competition. However, another local player, Webjet (WEB) has rewarded its shareholders handsomely over the same ten year period, despite also trailing the major players with deep pockets.  Here is a chart for Webjet.

Webjet and Wotif evolved to full service online travel agents from different starting points.  Wotif started with hotel accommodations and added flight travel; Webjet started with flights and added hotel accommodations.  As you can see from the chart, the last two years haven’t been kind to Webjet either.  However, one could look at the growth of Priceline’s local operation, booking.com, and the Expedia acquisition as clear signs global industry leaders see growth in the travel sector and are eager to tap into the Asia Pacific market through Australian companies.  

We can look at key ASX players in this sector from two perspectives – short term gain from takeover possibilities and long term investing in solid earnings growers.  To that end we selected six stocks operating in varying aspects of the travel business.  Three are online travel agents with divergent business models; one is involved with corporate travel; and two are major airlines. 

We first look at the companies as potential takeover targets. Then we revisit the stocks with an eye towards finding winning picks for a longer term holding.  Here is the first table, ranked by market cap.

Company

(CODE)

 

 

Earnings Growth Rate

1 Year

 

 

Earnings Growth Rate

5 Years

 

 

Earnings Growth Rate

10 Years

 

2 Year Earnings Growth Forecast

Long Term Debt

(FY 2014)

Gearing

(FY2014)

Qantas

(QAN)

126.2%

26.4%

-5.8%

-12.4%

$5.3b

226.2%

Flight Centre

(FLT)

5.6%

21.3%

15.2%

8.5%

$2m

4.1%

Virgin Air

(VAH)

10.7%

11.3%

-187.5%

45.2%

$1.59b

186%

Corporate Travel Management

(CTD)

36.9%

33.1%

0

0

Webjet

(WEB)

179.2%

18.8%

28.3%

6.1%

0

0

Helloworld

(HLO)

-36.7%

-11%

-3.6%

$23.3m

6.4%

 

Quite often data tables include “statistical outliers”, or numbers that seem disproportionate with similar numbers.  In this table the one year earnings growth rates for both Qantas and Webjet bear further investigation due to the variance with the five year numbers.  In the case of Qantas, a check of the FY 2014 Full Year results presentation shows substantial asset write downs and assorted non-recurring items totaling about $3.3 billion, which resulted in the company posting the largest profit decline in its history.   The Webjet results showed no major abnormals or write downs.

In theory, one would expect companies to have little interest in acquiring businesses that have a history of poor earnings, revenue, and profit growth and high debt levels. In practice, companies get bought out for reasons other than the sheer numbers. Both Virgin Australia Holdings (VAH) and Qantas Airways (QAN) are carrying a hefty debt load without much growth potential.  The 45.2% growth for Virgin is another statistical anomaly.  Further investigation shows a forecasted improvement from a loss of 2.7 cents per share this year to a loss of 2.5 cents in FY 2015 to a positive 0.03 cents per share in 2016.  Hardly the stuff of giant moves.

Yet both airlines could attract buyers.  In Australia airline industry ownership is government regulated, allowing for no more than 49% ownership in any domestic airline that operates internationally.  Virgin Australia shed itself of its relatively minor international flight operations and is getting foreign investors.  Etihad Airlines may take a stake in VAH approaching 20%.  If the government changes the regulatory requirements Qantas could become a merger or acquisition target as well.  

Corporate Travel Management (CTD) is a relative newcomer to the ASX, listing on 13 December 2010 with a first day trading closing price of $1.28.  The current share price is around $10.28.  This company operates exclusively in the more lucrative corporate travel market and has made some key acquisitions in the past few years.  CTD is now expanding in both its North American and Asian market and on 2 December this year announced the acquisition of another North American corporate travel company and one in Europe as well.  Currently the Expedia’s and the Priceline’s around the world do not cater to the corporate market, but stranger things have happened.  Corporate Travel Management has solid growth estimates, forecasted to grow from 20 cents per share this year to 30 cents in 2015 and 36 cents in 2016.

The remaining three stocks are OTA’s with the variation that Flight Centre Travel Group (FLT) has a unique business model that combines online purchases with brick and mortar travel agencies.  That separates this company from the crowd and combined with its respectable earnings growth track record and future forecasts could make it an attractive target.

Webjet Limited (WEB) may be small in market cap at $221 million, but the company has big plans and has delivered some impressive results.  Already a player in the consumer market, the company has expansion plans to become a major player in the business travel market.  Webjet has no debt and the share price has a solid record over ten years.  This one has the numbers and the growth potential to be a takeover target.  Here is the ten year chart, compared to the last stock in the table, Helloworld (HLO).

One year ago Jetset Travelworld Limited transformed itself into Helloworld Limited (HLO), consisting of three operating units, with locations in Australia and New Zealand, US, UK, Asia, and South Africa. The retail segment franchises travel agencies in Australia and New Zealand.  The agency network also sells wholesale travel packages.  The Travel Management segment caters to the needs of government agencies and large corporations. It remains to be seen whether or not Helloworld can improve the less than spectacular performance of its namesake predecessor.  Until then, a takeover offer is possible, but not likely.

Now let us remove acquisition potential from the discussion and look at these six stocks from the point of view of the retail investor.  Here is a table with some valuation and shareholder return measures.  

Company

(CODE)

Market Cap

Share Price

52 Week % Change

5 Year Total

Shareholder Return

3 Year Total

Shareholder Return

P/E

P/B

P/S

Qantas

(QAN)

$4.3b

$2.08

+100%

-7.2%

+12.2%

14.74

1.57

0.29

Flight Centre

(FLT)

$3.9b

$38.84

-16%

+20.5%

+39.1%

14.51

3.55

1.76

Virgin Air

(VAH)

$1.45b

$0.425

+12%

-5.8%

+15.4%

18.91

1.43

0.35

Corporate Travel

(CTD)

$967.3m

$10.15

+88%

+85.3%

41.63

7.45

7.91

Webjet

(WEB)

$221.5m

$2.89

+4%

+12%

+8.7%

11.94

3.28

2.34

HelloWorld

(HLO)

$106.5m

$0.28

-35%

-25.8%

-25%

6.8

0.33

0.43

 

The big surprise here has to be the 100% share price increase for Qantas.  The company has promised a turnaround and it appears investors are buying into it.  Despite the dismal FY Earnings results, the share price continued to rise.  Now you have the falling oil prices providing a heavy tailwind for both Qantas and Virgin. Here is a year over year price chart for the two airlines.

Flight Centre is another surprise, with the best rate of shareholder return.  Short-sellers bet against the success of brick and mortar travel agencies in the online onslaught and FLT spent a great deal of time on the Top Ten Short List, but no more.  The stock has reasonable valuations and impressive growth potential.  Webjet is another solid performer with a P/E under 15.  The final surprise is the bargain valuations of Helloworld.  Apparently investors are sceptical the newly named entity can avoid the mistakes of the past.

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