Flight Centre Travel Group Ltd (ASX:FLT), on Tuesday, lowered its guidance for the second-quarter to $355-$365 million from the previous guidance of $360 to $390 million primarily due to the weakness in the local market. Following the news, its shares nosedived almost 14%, compared to a gain of 1.3% for the benchmark S&P/ASX 200.

The condition is not specific to the company but overall Australian economy is kind of hanging in balance, facing an unspecified economic outlook, on the back of dropping mining boom, with efforts from the central bank to drive growth in other parts of the economy including tourism, by cutting interest rates to record lows.

FLT noted that a lower guidance is partly due to the discounts offered to attract the budget conscious leisure travelers. Further, higher wage cost and continued investments in marketing and other systems also accounted for lower margins. However, on Tuesday, FLT noted that for its flagship Flight Centre brand, gross margins are recovering, and are now near the similar levels as last year.

Though a lower guidance is disappointing, still there are a lot of positives in the company that cannot be ignored by the investors. Even though the pace of growth is sluggish in Australia, FLT’s International business is growing strongly. From competition point of view as well, FLT has an edge, fueled by brand awareness and large network. Also, along with announcing a lower guidance, FLT noted that it would register a “solid growth" in its overseas operations. On Tuesday, FLT noted that signs of a recovery in the second half of the year, adding that the market, overall, is returning to a modest growth after a flat first half. 


Flight Centre EBIT (Source - Company Reports)

While announcing a lower guidance, FLT’s managing director Graham Turner said that the company’s Australian business would "not achieve its normal growth trajectory" for the period. Turner also pointed that the consumer confidence is now lower than last year’s following a disappointing budget. However, Turner, did state that the company is seeing "strong demand and sales to the USA," and the trend is expected to continue. FLT reaffirmed that its businesses overseas excluding Canada would be profitable.

On International level, FLT is making way strongly to become the potential growth driver in the future. Recently, FLT announced expansion in Mexico, and has proven again that it can establish its business model successfully. It has expanded its operation in the UK, USA, Canada and selected parts of Asia. FLT is one of the world’s largest travel agency groups and operate in approximately 2,800 physical locations.

FLT, also, moved AirAsia to its preferred supplier network. This is the first agreement of the Asian firm in Australia, and will lead FLT and AirAsia to work jointly in promoting the airline fares, and create new and unique offerings for the customers.

Since December last year, the stock price had a strong run reaching around $46, but was sticking around $45, until Tuesday, in the wake of softer market sentiments. Further, the company posted profits over the past four years across all its 10 geographic segments, and seven segments of the total had record profits in the FY14.

ROE for FLT averaged around 22% since 2005. In FY14, ROE was around 23% along with a low-level of debt ($274 million) compared to its cash and short-term investments. At the end of FY14, cash and cash equivalents for FLT stood at $1.3 billion, which makes the company even stronger. With such financials, FLT now has ample
opportunities, as well as, strength to make acquisitions as long as it does not spend too much on overseas acquisitions. Also, paying a decent dividend would not be a problem for the company. Dividend trend has been impressive for FLT. Over the past five years, it has grown the dividends from $0.70 to over $1.5 in year 2014, which gives yet another reason to the investors to stick to this company. 


Results Summary (Source - Company Reports)

Along with little debt, FLT has big cash reserves that can be shoveled into expansion and acquisition. Cash flow for FLT has been solid since 2009, and its cash flow ratio (the quality of its earnings compared to its cash flow) has been 1.58 on average for the past 10 years. Also, the recent developments and acquisition from the company, should not alter this ratio.

FLT is one of the most popular companies in Australia with excellent brand awareness. Apart from operating online websites, the company is also into traditional brick and mortar stores. FLT has its business in leisure and corporate travel sector along with wholesaling. Management ownership is sturdy, which is essential for the business so vast. Founder and owner Graham Turner owns more than 15 million shares in the company. In Australia, the business is witnessing occasional upside, and lower oil prices might further drive the demand if flights become cheaper.


Flight Centre Daily Chart (Source - Company Reports)

Apart from being a leisure travel agency, FLT is also the world’s largest corporate travel managers operating through a network specialist brands. Corporate travel industry will keep the company growing by leap and bounds. Over the years, the fate of this industry has been questioned with the advent of technologies. Back in 1980s, with the emergence videoconference, it was assumed that this industry will suffer. However, nothing happened, and now in year 2015, traditional face to face meetings have scored over any other type of communication. Also, the company expect Australia’s total transaction value to be 3% higher this year primarily due to its corporate business.

FLT seems to be fairly priced at the moment with a price-to-earnings ratio of around 19 times FY15 earnings. Australian travel agency is looking shaken at this point of time, but when it will rebound, FLT shares will be the first one to recover, giving investors more reason to hold on this stock. The share price seems to be fairly valued at the moment and any further fall will create a buying opportunity for the investors.Therefore, we suggest a Hold on the stock at the current price of $34.21.

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