The travel sector was the star performer of the ASX today.
Shares in travel retailer Flight Centre Travel Group Limited (ASX: FLT) led the charge, finishing nearly 10% higher by the end of the day. Modest gains were also seen by Webjet Limited (ASX: WEB), up 2.9% and Corporate Travel Management Limited (ASX: CTD), up 3.3%.
Is now the time to buy back into travel shares?
FLT share price chart
WEB share price chart
Why the travel sector is looking brighter
The federal government has recently announced that international travel will resume for vaccinated Australians from November.
As flights will be able to be booked out of the country, companies like Flight Centre and Webjet will likely stand to benefit.
The sector got an additional boost after a recent announcement from pharmaceutical company Merck. Merck’s phase 3 trials for its oral COVID-19 drug found that it reduces a person’s risk of hospitalisation or death by 50% when taken within five days of symptoms appearing.
Is it time to buy back into travel shares?
The outlook for the sector is certainly promising. Webjet and Flight Centre will likely be direct beneficiaries from the resumption of international travel.
As my colleague, Lachlan Buur-Jensen pointed out in his article, both Webjet and Flight Centre had to double their shares on issue to provide the much-needed capital from the onset of the pandemic.
This means that earnings per share (EPS) has effectively halved. So while the share price chart implies there’s plenty more upside back to pre-covid levels, you’re getting a lot less for what you’re paying for.
The counterargument to this is that both these companies have a huge cash balance to ramp up growth which can drive earnings (profit) higher from here. This may be true, but only time will tell.
My take
An important question to ask yourself is why you’re thinking about buying shares in either Flight Centre or Webjet.
Do you think they’re wonderful businesses with compelling long-term outlooks?
Or, do you anticipate the share price will go up in the short term from more optimism and sales figures heading back up?
There are no right or wrong answers, but as long-term investors here at Rask, we focus on the former view.
Neither company was rapidly growing prior to Covid. And given that their businesses are mainly holiday retailing, I don’t find it to be the most attractive business model, compared to say, a software company with far more potential for scalability.
For the reasons outlined in the previous section, I also don’t think there’s a fantastic value proposition even though their shares look cheap based on the chart.
For the time being, I’m passing on both Flight Centre and Webjet.
If you’re after some more share ideas, click here to read: 2 ASX small cap shares I’d buy in October.
