Flight Centre
Recommendation
Flight Centre is a good business and we’d been giving it a bit of leeway towards the end of last year, as it hovered just above our price trigger for a downgrade to Take Part Profits. But a 13% surge so far this year has now forced our hand.
It’s hard to know where Flight Centre sits in the current market surge. It may be that people expect an improved global economy to help earnings – which it would, but we’re not there yet.
More likely it’s just that investors are looking at Flight Centre’s hefty free cash flow yield, then glancing at bond yields and then looking back at Flight Centre’s hefty free cash flow yield. In 2012 the company made about $285m in free cash, which amounts to a yield of about 9%. Needless to say, that looks very tasty compared to the 10-year bond yield of 3.5%.
However, Flight Centre’s cash flows can be pretty lumpy: for example, its current yield based on 2011’s free cash flow amounts to only 3.5%. And while the relative resilience of the local economy and the strong Australian dollar are surely helping current earnings, it’s hard to gauge to what extent. Meanwhile, the longer-term threat from the internet hasn’t gone away.
The stock doesn’t look expensive against current earnings and cash flow (the price-earnings ratio comes to about 14 based on forecast earnings per share for the current year of about 220 cents), but neither should it.
We’ll be taking a close look at the half-year result due on 21 February and, in the meantime, we're raising our price guides – but not by enough to prevent a downgrade. Particularly if your weighting to this stock has grown beyond our recommended portfolio limit of 4%. Flight Centre's share price has risen 31% since Flight Centre: Result 2012 from 28 Aug 12 (Hold – $23.70) and we suggest you TAKE PART PROFITS.