The Flight Centre Travel Group Ltd (ASX: FLT) share price has risen further to trade at $50, within touching distance of its all-time highs of $54. Flight Centre shares soared in mid-2017 – after trading as low as $28 – when the company announced that business conditions had improved and reported better than expected annual results.
Business was expected to continue improving in the first half of 2018, and UBS recently upgraded Flight Centre to buy, lifting its near-term price target on the stock to $53.60. While shares have risen strongly and business performance is improving, I am not confident that Flight Centre deserves to trade at a premium price compared to the rest of the market.
To put it another way, further growth in Flight Centre from here will have to come from business earnings improvement, not investors bidding the stock higher. Flight Centre is currently implementing a company-wide efficiency drive, with a focus on lifting staff productivity and aligning incentives to earnings performance.
Additionally, Flight Centre is expanding more into travel 'experiences' – owning tour guides and similar – so it can become more vertically integrated. This will let the company control more of the experience and capture customer dollars beyond the travel agent's desk. Over time I think this will let the company grow its earnings nicely, and perhaps even become somewhat less cyclical. Depending on what Flight Centre acquires, there can be a very strong moat around 'destination' experiences. I don't think these experiences will be a huge winner in the near term, but I believe management has a very good idea of what to acquire and I expect Flight Centre will continue to acquire shrewdly.
The major downside is that the company's valuation doesn't stand out. At $50, Flight Centre is priced around 22 earnings, which is fairly expensive. I like the company, am optimistic about its prospects, and continue to hold my shares, but I would not be in a rush to go out and buy them today.
