Flight Centre
Recommendation
At a conference last month, the chief financial officer of Flight Centre presented ‘An A-Z of Flight Centre’. The most concerning issue for shareholders today—and perhaps explanative of the 19% share price fall since our last review on 22 Feb 12 (Hold – $21.50)—is addressed in topic A ‘The Aussie Dollar v The US Dollar’. In a few dot points, the company claims no historical correlation between its results and the high Australian dollar, trumpets past profit growth despite past currency volatility and explains that the US dollar is ‘irrelevant to overwhelming majority of outbound passengers’. These points aren’t directly refutable.
But it is our thesis that Flight Centre’s leisure travel business is more cyclical than it was 15 years ago—back then the company benefitted from strong tailwinds, opening new stores at a breathtaking pace for wonderfully high rates of return. Today’s environment is tougher and more competitive, making same store sales growth more important to overall return. The company is also much more reliant on Australia than we might have predicted a decade ago. Australia’s economic boom has been the fuel for Flight Centre's profit growth in recent years. This is to highlight that perhaps past correlations won’t be indicative of future ones. If the Australian dollar continues to fall, then we believe it will eventually affect the company’s leisure business in Australia, and the positive effect on the value of its foreign operations won't be enough to compensate. While the US dollar might be ‘irrelevant’ to most travellers, a high Australian dollar (the other side of much the same coin) is relevant to almost all outbound travellers. If it sinks dramatically further—pushing the cost of airfares and foreign hotels higher—foreign travel might cease to prove an exception in the generally weak Australian consumer environment.
None of this is yet evident in the results. The company reaffirmed its 2013 guidance from February for profit before tax of $270m-$290m, which we make out to be post-tax earnings per share of between $1.90 and a little over $2.00. The stock is cheap on the numbers. If it sinks a little further, we’ll take a closer look with an eye to upgrading—it might be cheap enough to compensate for our longer term concerns. For now, Flight Centre remains a HOLD.