Webjet
Recommendation
The performance of Webjet has been nothing short of spectacular. Over the past five years earnings per share have risen by exactly 4 times, or an average of 32% a year. Given the excellent cash flow characteristics of web businesses, the dividend has done even better, rising 45% a year. Despite this, the cash balance has swelled by $14m and there’s still been a spare $17.5m to buy back shares.
Webjet is certainly making money while the Sun shines, but winter will arrive at some point and the company doesn’t look like it has too many warm clothes to protect it.
While sites like Carsales and Seek bring together thousands on both sides of a transaction, thereby giving themselves powerful network effects, Webjet gets its stock of flights and hotel deals from relatively few powerful companies. With a bit of marketing these companies could easily move their stock elsewhere.
This hasn’t happened yet and it may not happen for a while, but it’s a big risk hanging over Webjet and it means we’d prefer Carsales even if it was a lot more expensive. As it is, with the two stocks offering similar free cash flow yields (a little below 4% for the current year), we much prefer Carsales.
When we last covered the stock in Webjet – the unnecessary middleman on 02 Feb 07 (No View – $0.36), we wrote: ‘We’re not great believers that the Webjet model can dominate over the airlines’ own websites ... that said, the business has been performing very well off a small base, and we’ll continue to watch it and look forward to being proven wrong.’
The stock is up more than three times since then (after adjusting for a 4-1 share consolidation in June 2007) and we can’t say that being proven wrong is that much fun. But you can’t win ’em all in investing and it’s disastrous to try to. We continue to wish Webjet a safe and enjoyable flight without us. AVOID.
Note: Our model Income and Growth portfolios own shares in Carsales.com.