Let’s clear up one thing. Flight Centre is a good company.
It’s far more dynamic than just the bricks and mortar storesthat you see at shopping centres.
Below are three rapid points on what makes it attractive for investors.
Big Money Is in: Investment firms Credit Suisse and UBS have purchased $200m in stocks over the past few months.
International Growth: Revenue in India is up over 60%
Experienced Management Team: Founder and CEO Skroo Turner has a proven track record in the travel industry and recently, has personally purchased $10m worth of stock.
The stock hit a high of $69 per share in 2018 but since then, it has been on a decline.
The decline looks as though it is a changing in the business model as more and more people are moving to online sales and Flight Centre cut costs from the retail side of operations.
Even so, if the stock price does return to its pre-COVID price of $45, investors stand to make a 200% gain.
But, the biggest question is, how long will a recovery take?
This answer is changing on a daily basis. Let’s look at numbers and make a decison based on concrete information.
We know that domestic travel will get back to normal before international travel.
Whilst Flight Centre reports that there sales are 50-50 between domestic and international, the company makes a higher margin from international travel bookings.
Many equity analysts are now looking at 2022 as the year that Flight Centre will return back to profitabilty.
The estimate is them having revenue of $2.2bn with profit of $126m. To put those numbers in context, in 2019 revenue was $3.1bn.
The other notable issue on the road to recover is that whilst the company isn’t generating any revnue, they are reducing their equity postion by $60m per month.
This is made up from unavoidable fixed costs.
Management have made the decision to cut Flight Centre retails shop fronts by 50%. Closing underperforming outlets is generally a positive move and should be seen that way by shareholders.
It’s typical for the stock to decline after these announcements as a type of knee jerk reaction.
There is still demand for retail outlets particulalry in the more affluent suburbs. Older and wealthier clients are more profitable and work for the face to face service as they want to offload the planning and responsibility to someone else.
They also tend to buy products with more profitability like accomodation and travel insurance.
For a travel agent there is very little money to be made in booking flights.
There looks as though there is enough upside potential that would justify the risk. If the stock did get back to its pre-COVID levels of $45 and it took 5 years to get there, it still presents a potenial return to the investor at 24.57% per year. Key notes.
The biggest risk to the viability of the company is the threat of a second wave of COVID.
They are burning $60m per month when they aren’t generating revenue and it’s doubtful investors would be keen for an additional round of capital raising.
For that reason, after doing some of your own research it should be treated as a speculation turn around investment and make up a small part of your portfolio.
If you liked this type of analysis, you will love what we cover in our Private Investor Club each month!