The Flight Centre Travel Group Ltd (ASX: FLT) share price has jumped 43% in the past 12 months, and is up more than 50% from the March low of $28. Is it too late to buy?
In my view, when considering purchasing Flight Centre, a buyer must take 3 things into account:
- The shift from travel agent to owning in-destination experiences
Flight Centre has focused in recent years on capturing more of customer in-destination spend, rather than its traditional travel agent role of simply arranging the 'meeting' between customer and leisure 'thing' (hotel, flights, tour, etc).
In an optimistic world, the company feeds customers into its higher-margin and more exclusive destination services. Quality of customer experience is more under company control, and Flight Centre builds a more unique value proposition.
In a pessimistic world, the company is migrating towards this type of experience because it is gradually being pushed out by the dominance of Expedia and/or competition with other travel agents. I.e., it must evolve to survive.
Likely there are elements of both factors at work and in my view the question is not about 'which is true' but more 'what is the right price to pay for a company that is definitely in a transition phase?'
- The price
Transition implies uncertainty. Of course, there is always uncertainty in investing, but in my view investors would want to allow a greater margin of uncertainty in Flight Centre's case. I.e., the lower the price you pay, the wider range of outcomes you can endure without losing money. Additionally, although Flight Centre has an established business, it doesn't have a strongly unique product or moat that can't be encroached upon by competitors, which is another reason not to over-pay.
At today's prices of approximately 19x estimated full year earnings, Flight Centre is implicitly given greater growth potential than it was for most of 2016-2017. So of course investors must also consider:
- The growth
So far, Flight Centre's acquisitions and entrance into new ventures has been small. While some of the ventures such as tours are reporting astonishing growth, they are tiny and unlikely to 'move the dial' on earnings for several years. Likely further acquisitions and expansions will be necessary to continue to grow earnings, and the core travel agent business remains the primary earner for now.
Could Flight Centre conceivably be worth $70 or more in 10 years time? In my view, it has the potential. However, considering the company's growth, price, and the possible outcomes of its transition to in-destination experiences, I think that $44 per share is too high a price to pay for Flight Centre today, and I think it is a 'hold'.
