The share price of Webjet Limited (ASX: WEB) has bounced strongly since hitting a one-and-a-half year low of $9.22 two weeks ago and it looks ready to make further gains after UBS upgraded the stock to a "buy" from "neutral".
The upgrade helped propel the online travel services company up 3.8% on Wednesday to $10.52 and the broker thinks there might be another 20% upside for the stock to reach fair value.
Webjet had its wings clipped on a disappointing profit forecast earlier this month, but the big sell-off in the stock is an over-reaction as the company is well placed to grow earnings over the medium-term and the stock looks cheap on a price-earnings (P/E) basis.
Webjet is now the world's second-largest B2B online player in its category following its acquisition of Thomas Cook. UBS believes its number two position gives it strong leverage to gain more market share in the $70 billion B2B market.
What's more, the stock is trading on a FY19 P/E under 15 times when adjusted for the Thomas Cook acquisition and its cash position, noted the broker.
That is cheap considering that Webjet forecasts three-year earnings per share (EPS) compound annual growth rate (CAGR) is 11%.
While the big earnings kick from Thomas Cook isn't expected until FY20, UBS isn't factoring in any margin expansion from the enlarged group. This means there is further potential earnings upside if Webjet can leverage its economies of scale.
UBS has a price target of $12.60 on the stock.
Webjet offers better value than bricks-and-mortar peer Flight Centre Travel Group Ltd (ASX: FLT) after the latter rallied 41% since the start of the calendar year when Webjet is struggling to keep its head above breakeven.
Also, Flight Centre's rival Helloworld Travel Ltd (ASX: HLO) is nipping at its heels following Helloworld's $32.5 million acquisition of Magellan Travel Group, which will lift its TTV by around $900 million.
Helloworld is far more a competitive threat to Flight Centre than Webjet.
Webjet's valuation also compares very favourably to other leading online stocks such as Carsales.com Ltd (ASX: CAR) and REA Group Limited (ASX: REA), even though there is a greater level of earnings uncertainty for the former.
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