The negative market reaction post the trading update, commensurate with market downgrades to FY15 earnings reflect the potential impact on earnings in the event that poor consumer sentiment continues into 1H15, now see the stock trading on a FY15 P/E multiple of 15.6x, which does not appear to be an unreasonable multiple to pay for a quality stock like FLT.
Incorporating expectations of poor consumer sentiment continuing into 1H15, we note that the Company is still expected to generate low double digit EPS growth of around 10% for FY15, according to consensus estimates. From a fundamental viewpoint, we acknowledge that for the stock to return to recent highs (around $50, which would imply a FY15 P/E of around 17.5x), the Company would need to re-demonstrate its ability to report strong earnings growth (double digit) over the next few years. To this end, domestic leisure demand typically rebounds quickly from the fall in consumer confidence and the earnings are also positively leverage to the rising A$.
Other factors likely to underpin strong earnings growth over the next few years include i) A more meaningful contribution from businesses outside of Australia (as 80% of earnings are currently generated in Australia), ii) FLT gaining further market share in the corporate travel market, iii) The Company’s dual physical stores/online channel gains traction and iv) Margin improvement expected from the transition in strategic positioning from being a travel agent to a retailer of travel products to leisure and corporate customers.
The charts suggest that a rally back into the low $50’s is certainly possible, representing a 10%+ return from current levels.
