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An ‘unbeatable’ investment?

Aided and abetted by a high Australian dollar, it seems we’re absolutely mad about traveling. In 2011 alone, more than 7 million Aussies ventured overseas — about a third of the population. No wonder, then, that one of the world’s most successful travel agencies (as well as the nation’s largest corporate travel business), Flight Centre (ASX: FLT) is Sydney born and bred.

We’re all familiar with those distinctive red storefronts. Flight Centre travel agencies are located all over Australia, in shopping centres from the Gold Coast to Perth, as well as in 10 foreign countries. These bricks-and-mortar stores, some 2,500 in total, account for the vast majority of Flight Centre sales.

And for many analysts and commentators, this is the problem. Since the early 2000s, fears that the Internet will eat Flight Centre’s business have dominated discussion. Yet a look at the company’s financials over this same period shows a much different picture, with Flight Centre’s business growing rapidly even as many web-based travel companies have also grown (and despite the GFC!). For the first half of the 2013 financial year, for instance, the company booked record earnings per share.

Reports of its death are greatly exaggerated

The Internet hasn’t killed the Flight Centre star yet. In fact, Flight Centre’s continued expansion poses an opportunity for risk-tolerant investors. I’m sure I don’t have to tell you that China is a massive market, or that Flight Centre, with its quite small store presence there today, has a long runway (if you’ll excuse the pun) of growth before it. Most recently, in the first half of 2013, the company’s China sales rose 31% to $73 million.

Also key is Flight Centre’s expansion into America, currently Flight Centre’s second largest market by revenue, with total transaction value of nearly $2 billion in 2012. Despite the recency of Flight Centre’s move into the States and its expensive pre-GFC acquisition there, its American operations — corporate, wholesale and Liberty Travel — are already profitable at an operating profit level. The flagship New York hyperstore, open since October 2012, is performing well, according to company presentations. Additional stores are in the works for Boston and Houston.

A push into mobile and a “blended” sales model across all Flight Centre operations the world over — combining the strength of the store network with the company’s e-commerce presence — further rounds out the picture for continued sales growth. (While often posed in binary terms, it’s important to remember that internet sales and the bricks-and-mortar stores don’t have to be an either/or proposition.)

Competition and competitiveness generally inform the company’s operations on the micro-level too. Co-founder and CEO Graham “Skroo” Turner has explained his management model to The Australian Financial Review as one of “family, village, tribe,” which drives the leaders of small teams in a Darwinian system “with the top performers rising rapidly through the ranks to senior management”.

Closer to home, the continued strength of the Australian dollar and cheap international fares (some 20% cheaper today than five years ago, according to company research) makes overseas travel even more alluring. In the near term, this should lead to increased bookings at Flight Centre. It’s is a double-edged sword however, with the high Aussie dollar affecting the company’s domestic-travel offerings and also impacting the company as it repatriates money earned abroad.

Foolish takeaway

Given the growth prospects and risk profile, Flight Centre shares appear to be fairly valued today, trading at 18 times earnings or an EV to EBITDA ratio of about 9, and with a fully franked dividend in the 3% range. If you don’t already own shares, you may want to put this high flier on your watch list.

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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