It has been about two weeks since Flight Centre Travel Group Ltd (ASX: FLT) released an earnings downgrade that saw the share price fall by more than 22%. Since then, the share price has stabilised and has been trading between $33 and $35.
With the share price looking like it may have bottomed and the current valuation appearing quite cheap, now may be a good time for investors to start buying.
Flight Centre offers an attractive value proposition for investors seeking growth and income. Although there are a number of short-term headwinds, the long-term outlook is still quite bright especially for its overseas business units.
The primary issue facing Flight Centre is the Australian consumer. The Australian leisure market is Flight Centre's largest revenue contributor and over the past five years has grown at a compound rate of 8.5% each year. Unfortunately, poor consumer confidence has resulted in slower than normal sales growth of only 2.7% for 2015.
The slowing of mining activity in some parts of Australia has also affected the corporate travel sector and has resulted in lower-than-expected demand.
The situation has been compounded by reduced gross margins as Flight Centre has tried to stimulate domestic demand through lower pricing. Flight Centre is confident that margins have now stabilised and has undertaken significant investments in marketing to grow its market share.
Some of the decline in the share price can also be attributed to fears that Flight Centre is losing market share to online only travel agents. There are concerns that online only agents are more price competitive as a result of lower cost structures compared to Flight Centre's bricks-and-mortar operations.
I think it is important for investors to be aware of the value of Flight Centre's brand. Nearly every household in Australia who has travelled domestically or abroad will have come across Flight Centre in one way or another. Although operating bricks-and-mortar stores may cost more than pure online agents, it is a differentiating feature of Flight Centre. Those people with complicated travel plans, or inexperienced travellers will often want assistance in planning their trips and Flight Centre is usually the first place they will go to get face-to-face help.
Although the Australian business may have not performed to management's expectations, the international business is growing strongly. Four businesses – the United Kingdom, United States, Singapore and South Africa are on track to deliver record earnings before interest and tax (EBIT) and there are plans for further expansion in FY16.
The Australian business is still the largest contributor to earnings, but the international market will become an increasingly important contributor to Flight Centre's growth. There are greater opportunities for growth in the international market and Flight Centre is well placed to take advantage of this with over $500 million of cash on the balance sheet.
Foolish takeaway
There is no doubt the share price deserved to fall following the profit downgrade but I think the market has over-reacted. The shares are now trading at around 13.5x FY15 earnings and offers investors a fully franked dividend yield of around 4.5%.
Flight Centre is still going to produce a pretty good result and as long as there are no nasty surprises when the full year results are released, I think investors should see this as a buying opportunity.
