Flight Centre Travel Group Ltd (ASX: FLT) is a travel agency business that provides services for leisure and business travelers around the world. It has more than 30 brands in the leisure, corporate and wholesale categories.
As the year draws to a close and you prepare to take a break and travel, you might wonder whether Flight Centre might be a good company to invest in given the demand for their services this time of the year.
Here are four things you need to know before you invest in flight centre:
- Profitability: Flight Centre makes decent returns on equity with a ROE ratio currently at 16%. In the past couple of years this has been much higher at around 20%. Flight Centre has a large network of retail shops and a strong brand that's well known which drives travelers to consistently use their services. The question however is whether this can be sustained in the future. Cost sensitive travelers will always be tempted to book and organise trips themselves and cut out the middle man by reaching out to suppliers directly. New online platforms that challenge Flight Centre's business model will be able to operate with lower costs as they won't have CBD rent and wages to pay. This could be a longer term structural concern and perhaps Flight Centre can adapt its own business model in this direction. The flip side of it is that Flight Centre's scale allows it to negotiate better deals with travel providers.
- Financial position: Flight Centre is in a strong financial position with over $1.2bn in cash and net cash of over $400m as at 30 June 2017 which excludes cash received from customers but not yet paid to suppliers and no long term debt. Its business model allows it to convert profits to cash very easily with gross operating cash flow typically exceeding EBITDA.
- Dividends: The company has a dividend yield of 2.9% which is not the highest out there but with a payout ratio of 60%, it's quite sustainable.
- Valuation: Flight Centre's PE ratio of 20 is higher than the sector average of 19 and the market average of 16.8 which suggests that it's not cheap.
Overall, I wouldn't necessarily rush to buy into it, but if I already owned Flight Centre shares I'd be holding them.
