Flight Centre Surprises Even The Bulls

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED. For more info SHARE ANALYSIS: FLT

By Chris Shaw

Having previously indicated earnings before tax for FY10 would be in the range of $125-$135 million, Flight Centre ((FLT)) surprised the market yesterday by lifting this guidance range to $160-$180 million, Credit Suisse suggesting the increase is essentially a bringing forward of the recovery in volumes it had expected would occur in 2011.

What is most significant about the upgrade, in the view of Credit Suisse, is any improvement in yields is yet to play a significant part of the strong performance in recent months, which CS suggests implies the low end of the revised earnings guidance range is likely to be conservative and the higher end more than achievable, especially as prices have been gradually increasing in recent months.

To reflect this, CS is forecasting a profit before tax for the year of $185 million, which is slightly above the revised guidance range. In earnings per share terms this means Credit Suisse is forecasting 120c for FY10 and 134.7c for FY11, which compares to Deutsche Bank’s forecasts of 116c and 155c, up from 95c and 132c respectively.

The changes to Deutsche’s numbers reflect a stronger performance from Flight Centre’s Australian operations, driven by higher ticket sales and a gradual improvement in yields as the price increases mentioned by Credit Suisse have started to flow through. As with Credit Suisse, Deutsche’s adjusted numbers now factor in a return to more normal earnings levels faster than had been expected, its numbers now calling for this to occur in FY11 as against FY12 previously.

Others in the market have similarly lifted earnings forecasts to reflect the new guidance from management, UBS increasing its numbers by 12% in FY10 and 15% in FY11 to EPS forecasts of 120c and 147c. UBS makes the point earnings risk remains to the upside given its view Flight Centre is still operating at less than peak earnings given further cyclical upside potential.

Consensus EPS forecasts for Flight Centre, according to the FNArena database, now stand at 120.4c and 141.6c for FY10 and FY11 respectively, while the database shows the stock is rated as Buy four times and Hold three times following upgrades to Buy by Credit Suisse and to Neutral by JP Morgan.
 
It is JP Morgan’s view that while the upgrade to guidance itself was no great surprise given ticket sales have been rising in a number of markets, the magnitude of the upgrade was a surprise, as it showed the stockbroker had been underestimating the correlation between travel volumes and the strength of the Australian dollar.

Given a bullish stance on the outlook for the Aussie dollar in 2010 against the US dollar in particular, JP Morgan’s new earnings forecasts represent increases from its previous numbers of about 20% and 12% respectively for FY10 and FY11, so its new EPS numbers are 118.8c and 124.7c respectively.

What keeps JP Morgan from moving above a Neutral rating is its concern there remain some fundamental structural issues the company needs to contend with, including the migration from traditional bricks and mortar style travel agents to online platforms and the current aggressive store rollout program, which JPM sees as likely to reduce per store traffic numbers.

To reflect its cautious view JP Morgan has a price target on Flight Centre of $18.38, which while up from $13.96 previously remains conservative given an average target according to the database of $21.82. This is up from $18.34 prior to yesterday’s lift in earnings guidance.

Macquarie also rates the stock as Neutral, taking the view while yesterday’s news was obviously a positive from an earnings perspective, the shares have run hard of late, with the stock seen as fully priced at current levels.

Shares in Flight Centre today are stronger and as at 11.45am the stock was up 89c or 4.7% at $19.89, which compares to a trading range over the past year of $3.39 to $20.15, at which it traded earlier today.

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