This ‘hot’ summer growth stock has further to go

Bilaal Mohamed reckons there’s plenty more upside left in this fast-moving travel firm.

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We’re fast approaching that time of year again when children are nearing the end of the school year and families are looking forward to a well-earned summer break. Of course, one of the more popular family pursuits during the summer holidays is to head off to the beach, be it at home or abroad.

Benidorm

These days, travelling to exotic(!) places such as Benidorm can be cheaper, if not always more cheerful, than Blackpool or Brighton. Families can head off with just a passport, Union Jack shorts, and flip flops without the fear of the meteorological uncertainty that we call the Great British weather. One thing’s for certain – the foreign beach holiday is here to stay.

So who’s cashing in on this phenomenon? Well, the big players such as TUI Travel Group, which owns brands such as Thomson and First Choice Holidays, and Thomas Cook Group which also owns Airtours and Club 18-30, have been making money hand over fist for decades. But more recently, the advent of do-it-yourself online travel agents have been making life a little more difficult for traditional high street operators.

Humble beginnings

One of the newer online operators is On The Beach Group (LSE: OTB). No prizes for guessing what type of holiday it specialises in. This travel firm has graduated from humble beginnings as a start-up business in a terraced house in Macclesfield in 2004, to a full listing on the Main Market of the London Stock Exchange just 11 years later.

Two years on from its September 2015 stock market debut, the Stockport-headquartered business is worth in excess of £500m, and the shares have soared from their 184p IPO price to recent highs of 412p. On The Beach is now one of the UK’s largest online retailers of beach holidays with an approximate 20% market share of the online short haul market. Certainly, the business has made great inroads into its chosen market, but how much further can the share price go?

More traffic

I think a lot further. During the first six months of the current financial year, pre-tax profits for the group rose by an impressive 33.8% to £9.9m, with total revenues up 7.3% to £38.1m, compared to £35.5m for the same period a year earlier. Daily unique visitors to the website increased by 9.5% to 27.5m, with branded and free traffic now accounting for 56.7% of overall traffic.

What I find most impressive is that the percentage of revenue spent on online advertising actually decreased to 40.4% over the same period, with continued growth being delivered by increasing conversion and improving margin while increasing market traffic share.

The share price has performed particularly well since January, rising 50%. But with earnings forecast to rise by 73% over the next two years I think a P/E rating of 17.4 for FY2018 means the shares still offer strong growth at a very reasonable price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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