Buy the travel agent, not the airline. Investors who bought shares 10 years ago would have been a lot better off with Flight Centre Travel Group Ltd (ASX: FLT) rather than Qantas Airways Limited (ASX: QAN) or Virgin Australia Holdings Ltd (ASX: VAH), and that premise is likely to hold true over the next decade as well.
Flight Centre continues to look like an attractive investment, with a great cash balance, numerous growth opportunities, and positive tailwinds. Here's what I like:
- Trades on a Price to Earnings (P/E) ratio of 14, slightly below the ASX average
- Has over $400 million in company cash compared to $21 million in debt
- Pays a 4.2%, fully franked dividend which was roughly 57% of profits earned in the most recent half-year (many ASX companies pay 70% or more to achieve a similar yield)
- Total market size (outbound travel) is growing at around 3-4% per annum
- 53% of Total Transaction Volume (TTV) was earned in Australia in the first half and 47% overseas
- 49% of TTV in Australia came from the Flight Centre brand, while 51% came from other brands like StudentUniverse, Top Deck, BYOjet.com etc
- Well diversified stable of brands that target different age groups of outbound travellers
- $110 million in capital expenditure in Financial Year 2016 to drive future growth
- Upcoming innovations include virtual travel agent 'Aunt Betty', digital travel wallet and a systems upgrade, as well as other efficiency and marketing initiatives
- According to the May presentation, Flight Centre is targeting underlying profit before tax growth of between 4% and 8% this financial year
Recently, investors have been concerned about Flight Centre's market share, with other players like Webjet Limited (ASX: WEB) performing strongly. With its global and brand diversification however, Flight Centre appears to be fairly well insulated from competition – much of the company's strength is in its store network and travel consultants. The expansion into no-fee virtual travel should strengthen the company's online offering, while also reducing dependence on any one brand.
Flight Centre has also been expanding further into mainland Europe and the US with its brands, which brings additional diversification. With profit growth before tax of between 4% and 8%, investors are looking at a return of at least mid-single digits (including dividends) per annum which is decent for a stock trading on 14 times earnings.
