Flight Centre stock price still flying too high, says Morningstar

Shares in global travel agent Flight Centre are overvalued, trading at a 27 per cent premium to their $38 fair value estimate, according to Morningstar equity analyst Brian Han.

This is despite a fall of almost 30 per cent in the company's stock price since August.

In a  special report, Han recommends investors "take flight" at current prices as more and more customers migrate to online-only services rather than bricks-and-mortar travel agencies.

"We believe the structural headwinds buffeting this the Australia and New Zealand divisions will continue, with Flight Centre's efforts to expand into corporate travel and overseas markets unable to offset," Han says.

"As such, we see the current trading multiples as still too high, despite our high regard for management's operating prowess."

Shares in Flight Centre (ASX: FLT) have slumped 28 per cent since 23 August 2018, trailing the S&P/ASX 200 Index by 20 per cent during the period.

Han's primary concern remains pressures on Flight Centre's local physical store-based model. In his view this pressure will intensify as consumers become more comfortable dealing directly with suppliers and online agencies, and as technology erodes the information gap between the group and the leisure traveller.

Since its founding in the 1980s, Flight Centre has amassed a physical network of almost 3000 shops in more than 90 countries.

Han views the expansion into the corporate travel as a sensible diversification strategy but doubts it will be enough to offset the headwinds buffeting the wider business.

"All the other operators in the space are aware of the opportunities in the corporate market and there will never be a shortage of competitors in this fragmented space willing to attract corporate customers with aggressive deals and more advanced/customised solutions," Han said.

As such, he sees Flight Centre's current trading multiples as "too high" – despite his high regard for management. He warns investors to keep their seatbelts tight as more turbulence lies ahead.

"Compared with its domestic and US leisure peers, we believe Flight Centre's current trading multiples are still on the expensive side, especially given the muted earnings growth outlook, at least for the next three years.”

Flight Centre stock price losing altitude since fiscal 2018 result release