Webjet Limited (ASX: WEB) shares are still battling away to reach their former heights. But yet again, COVID has stopped Webjet’s gradual rise.
WEB share price
Further lockdowns
Mr. Market tends to absorb and then react to any short-term news rapidly. There is no rest for the wicked as they say.
Upon news of another lockdown in New South Wales, travel stocks like Flight Centre Travel Group Ltd (ASX: FLT) and Qantas Airways Limited (ASX: QAN) have taken a nosedive.
Out of these three travel stocks, my pick would be Webjet. Why?
Given all of them are relying on debt to survive such unprecedented times, I would rather stick with businesses that have high gross margins supported by a capital-light business model.
Flight Centre has recorded gross margins of around 40-45% and Qantas lags behind with 25-33% gross margins historically.
Webjet smashes both with historical gross margins ranging between 70-80%.
Is Webjet the best of a bad bunch?
Whilst Webjet may have a more scalable business model, there is a lot of optimism priced in at the moment.
Webjet has an Enterprise Value to Revenue (EV/Revenue) multiple of around 37x, which is near record highs. The enterprise value of a business is the value of a business if it was for sale i.e. minus cash and add debt.
The EV/Revenue multiple has hovered between 2x and 6x in the last five years just to illustrate how much expectation the market has built into Webjet.
EV/Revenue for Flight centre and Qantas is 5x and 2x respectively.
Multiples only serve as a relative measurement tool, even though Webjet has a high multiple, the more important question is whether it has the ability to generate a rate of return that exceeds market expectations.
Investors should also keep an eye on Flight Centre’s play to reward its employees.
If you are interested in how this can be done, I’d recommend signing up for a free Rask account and join Rask Invest.
