After soaring above $13 in March, shares of Corporate Travel Management Ltd (ASX: CTD) have fallen almost 30% to trade around $9.50. Should investors be concerned?
Share price
Corporate Travel Management (CTM) reported earnings per share of $0.28 in the 2015 financial year (FY15). When its shares hit $13 it was trading on a price-to-earnings ratio (P/E) of 46 and many investors probably considered it was trading above its fair value.
If CTM doubles its earnings over the next 4 years and the shares are still trading at $9.50, it will trade on a P/E ratio of 17. The average P/E ratio of the ASX is currently 15.5 which provides some perspective of the growth expectations priced into the business.
Over the past 3 years, CTM's share price has had a great run and long-term investors have enjoyed a 250% gain (even after the recent 30% fall).
Organic profit growth
Recently, the market has taken a dim view toward companies growing mainly by acquisition – such as childcare operator G8 Education Ltd (ASX: GEM) – and the market has wondered if the growth is sustainable.
Corporate Travel Management (CTM) is active in the acquisition market and added Travelcorp, Westminster Travel, USTravel, Avia International Travel, Chambers Travel and Diplomat Travel to the CTM group in the past 3 years.
The key difference that separates CTM from others like G8 Education is organic growth – the growth it achieves from building and improving its existing businesses, not the growth via acquisitions.
CTM's latest full year results presentation noted that more than 50% of the profit growth was organic. This is an impressive figure considering that group total transaction value (TTV) increased by 92% from $1.38 billion in FY14 to $2.66 billion in FY15.
Return on equity
CTM is debt free (another important difference to the typical acquisitive business) which places it in a strong position to grow the business organically and to fund future acquisitions.
The return on equity (ROE = profit/equity) has been declining after the recent string of acquisitions where CTM is paying more – from a value perspective – to acquire these businesses compared to its organically grown earnings.
Why would it do this, you may ask? The acquisitions provided CTM an established brand and immediate access to the US, European and UK markets rather than trying to build up the business from scratch. This is worth the extra price if they prove to be valuable acquisitions.
For a simplified example, let's assume (these aren't CTM's actual figures) that during FY14 CTM used $50m equity to deliver a net profit of $10m. Therefore ROE (FY14) = $10m/$50m = 20%.
Now, during FY15 CTM acquired Chambers Travel for $50m but it will only contribute $5m in net profit. We now have the CTM ROE for FY15 = $15m / $100m = 15%. ROE has declined due to the acquisition.
Investors should monitor this metric as it will provide insight into the relative performance and integration of the acquisitions – ROE should increase as the new businesses are bedded down into the company and any synergies realised.
Foolish takeaway
CTM forecasts 25-30% growth in underlying earnings for FY16 and I expect it to continue growing quickly in the future. With no significant news coming from the company, it appears the recent sell-off is likely due to some profit taking.
The share price of a high-growth company trading at a premium to the market is often volatile, and a plummeting share price can cause people to question their investment thesis. However, volatility can be the long-term investor's best friend and provide an attractive entry point into a high-quality business like Corporate Travel Management.
