Flight Centre Travel Group Ltd (ASX: FLT) flew its shareholders into turbulent airspace last week as its shares plummeted on the back of another earnings downgrade. The shares traded at $44.59 on Tuesday, before plummeting 23.3% following the earnings downgrade to just $34.21.
In an update to the market, Flight Centre said it expects full-year underlying profit before tax (PBT) to be between $355 million and $365 million, the mid-point of which is at the bottom of the company's previously targeted range of $360 million to $390 million. Notably, that targeted range was only provided in December when Flight Centre first downgraded its earning guidance from between $395 million and $405 million.
So What: The travel agency business has long defied the doubters of its business model, many of whom believed it was only a matter of time before Flight Centre fell victim to the online sector. Rather than crashing however, Flight Centre's profits and earnings per share have continued to rocket higher, resulting in fantastic shareholder returns.
Indeed, prior to last week's decline, the stock had surged 160% over the last three years and a remarkable 1,203% since the depths of the Global Financial Crisis in 2009.
However, investors now fear that those structural changes have come to fruition after the company's managing director, Graham Turner, cited a loss in market share to the online players last week. That likely includes companies such as Webjet Limited (ASX: WEB), together with Airbnb, Priceline and Expedia. He said that the company's leisure turnover for the year was just 2.7%, underperforming the market's 3% growth rate as online agencies stepped up their game.
Notably, this may also be the result of the tough economic environment, whereby consumers are turning to cheaper ways to book their travels. Indeed, Flight Centre did cite a number of cyclical issues for its earnings downgrade, which included diminishing consumer confidence and a slowdown in the mining boom.
Now What: Personally, I believe the sell-off has been overdone whereby investors are putting too much weight behind the demise of traditional bricks-and-mortar travel agencies. Sure, I believe online travel booking will be profitable in the years ahead (indeed, I own shares in the US-listed Priceline and TripAdvisor), but I believe companies like Flight Centre will also continue to play a key role in aiding travellers.
One of the key reasons behind this belief is that while booking trips online might be more convenient, it is made more difficult for complex booking arrangements. At the same time, companies like Flight Centre can bundle together packages, making the overall trip cheaper for the individual than if they were to book it themselves online.
Although Flight Centre is by no means a risk-free investment prospect, I do think the shares present as excellent value today, especially considering the company's growth prospects internationally.
