It seems my identification of Flight Centre Travel Group Ltd (ASX: FLT) as a bargain buy was early indeed, with the company today revealing that tough trading conditions could result in a significant drop in profit for the full year.
Despite growth in Total Transaction Volumes (TTV), earnings will likely be down due to heavy discounting on behalf of airlines. Here's what you need to know:
- TTV expected to top $20 billion for the first time (Financial Year 2016: $19.3 billion)
- Underlying Profit Before Tax (PBT) is expected to be between $320 million and $355 million, compared to $352 million last year
- Underlying first-half PBT is expected to be between $105 million and $120 million ($145 million in first half last year)
- Slower TTV growth and poor performance due to lower airfares in key markets, with airfares falling 4% in second half of last year, followed by a further 7% in the first half of this year
- Currency movements and subdued trade in the UK following the Brexit vote plus uncertainty in the US due to the presidential elections and Zika virus
So What?
It looked to be bad news all around, with lower airfares offsetting ticket numbers 'growing at the fastest rate we have recorded since 2014.'
Positive news regarding the Australian market and several acquisitions failed to stir investors, and Flight Centre shares are now down 10% to $29.40 at the time of writing.
There's unlikely to be any relief in the near term, with short-seller interest in the company recently reported at 8%. I wouldn't be surprised to see it intensify as an equally weak second half (Flight Centre expects a stronger second half) seems a possibility, given the high levels of competition in the airline business.
Now What?
Companies are only "cheap" if their earnings aren't falling, and Flight Centre's update today has understandably shaken the confidence of investors. However, it's important to take away the fact that the group's underlying business is still growing volumes strongly, despite the decline in airfares. Flight Centre has a strong balance sheet with minimal debt, and its growing exposure to India and China will give it an important foothold in two huge growth markets over the long term.
Shares in corporate competitor Corporate Travel Management Ltd (ASX: CTD) were largely untouched, down 0.3%.
I continue to believe Flight Centre looks like a good long-term business, but investors should be prepared for volatility in the near term.
