Many companies have had a terrific 2023, but plenty of them are high-flying technology companies. However, since August, shares in On the Beach (LSE:OTB) have nearly doubled in recent months after it reported its “best summer ever”. So is this FTSE company potentially a real winner in the travel sector as some of its peers continue to struggle following the pandemic?
That sudden rally
The first half of 2023 wasn’t anything special for the company as the management team attempted to get things back to normal following a difficult few years. But as it reported earnings in September, it became clear that the business was performing much better than the market was expecting. This has led to a steady rally in the second half of the year.
With revenue of £1.1bn, marking a 26% increase year on year, profits soared an impressive 66% to £23.6m for the year ending 30 September. The firm also announced the reinstatement of its dividend from the full year 2024, reflecting its robust cash reserves and healthy financials. Needless to say, investors have liked what they’ve seen so far.
But with aggressive rallies such as this, buying in can be tricky. Clearly there’s still a cost-of-living crisis in the UK, and investors may wonder whether travel will continue to be a priority for many people who are struggling to pay the bills. That may mean the share price goes down again on the slightest bit of bad news.
However, analysts referencing the recent challenges in the luxury goods market due to cost-of-living pressures have observed that this trend hasn’t yet impacted the premium holiday segment. And holidays in general remain in demand. As a result, the future still looks good for the company and it continues to report strong forward bookings, with sustained demand for both short and long lead time bookings.
Valuation
I’d never want to a buy a company just as the rally finishes. However, the valuation of the company suggests there may be more room to grow. A discounted cash flow calculation, which calculates an approximate fair price, also suggests that the share price of £1.50 is about 66% below the fair value of £4.35. The price-to-earnings (P/E) ratio of the shares at 23.5 times is fairly close to the average of the UK travel sector at 26.4 times, so I wouldn’t be too afraid of picking up shares at this price.
However, with 29.5% growth in earnings forecast, FTSE investors may continue to like this one if the share price keeps moving higher.
No stock is risk-free
For a company doing so well in the sector, and with absolutely no debt, it very much controls its own destiny. However, there’s always the chance that the economy takes a negative turn, impacting the demand for premium travel. Yet I suspect that On the Beach is far better positioned than many to get through any short-term disruption.
What’s the verdict?
I like what I see with this company. Not many FTSE firms have as many positive areas of their business, most notably a lack of debt and strong growth figures. I’m usually cautious when it comes to companies that have seen such growth in a short period, but I’ll be taking a small position at the first chance I get.
