Flight Centre Travel Group Ltd (ASX: FLT) provides travel retailing, wholesaling and corporate travel management services.
Shares of Flight Centre current trade at $56.86– an increase of 95% over the previous twelve months. The 52 week high is $59.30, and the 52 week low is $28.52. With earnings per share of $2.32 in 2017, shares are currently trading at a price to earnings ratio of 24.54 based on 2017 earnings. Analysts have forecasted earnings of $2.65 per share in 2018, an increase of 14.5% on the previous 12 months. This puts the current share price at a price to earnings ratio of 21.4 based on forecasted 2018 earnings.
In the last 10 years, Flight Centre has grown its book value at an annualised rate of 9.8%. The current price to book ratio is 4.05. Over the same period, Flight Centre has grown earnings at an annualised rate of 5.2%, and its cash flows have decreased at 3.5%.
Over its last 5 financial reports, Flight Centre's return on equity has ranged from 9.2% to 12.65%, and has averaged 10.95%. This represents only a moderate return over that period.
In 2017, Flight Centre paid a fully franked dividend of $1.39.
So what are the shares worth?
According to its 2017 financial report, Flight Centre held no interest bearing debt, and $1.28 billion in cash and equivalents. At a current market cap of $5.79 billion, Flight Centre's enterprise value is around $4.51 billion. With earnings before interest, tax, depreciation and amortisation (EBITDA) of $406.2 million, the company's enterprise multiple is around 11.1. An enterprise multiple of 10 would be a fair price to pay, and this would necessitate a market capitalisation of $5.34 billion, and a share price of $52.86.
A discounted cash flow model using the historical growth rate in book value as the growth rate for the next 10 years and then a 2% growth rate thereafter, capital expenditures equal to those in 2017, and a required return of 10% per year places the intrinsic value of the shares around $55.70. This is, of course, heavily dependent upon the growth rate and your required return. A required return of 15% would place the intrinsic value at $39.67.
FOOLISH TAKEAWAY.
Based on the above, shares are probably worth somewhere between $40 and $50, less any margin of safety that you desire. However, the calculation of intrinsic value is not an exact science. Given the historical growth in book value and returns on invested capital, I'd be happy to buy the shares at around $50.
