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Should you buy Flight Centre?

Travel group Flight Centre (ASX: FLT) has reported a strong start to the 2014 financial year, and confirmed that it is expecting to grow underlying profit before tax (PBT) by between 8-12% for the full year.

In 2013, Flight Centre grew PBT by 18% to $343 million, its sixteenth year of profit growth in eighteen years as a listed company. The company expects to report profit before tax of between $370 million to $385 million in 2014.

Speaking at Flight Centre’s AGM today, managing director Graham Turner said, “Trading results so far are promising and indicate that we will be tracking within our targeted range in PBT terms at the end of this month (October). Total Transaction Value (TTV) growth has also been solid.”

Mr Turner added that, as expected, the fluctuations in exchange rates do not seem to have affected Australian outbound travel. He says that both the company’s leisure and corporate businesses have improved year-on-year, but leisure was recording stronger growth. In July 2013, Flight Centre opened its 2,500 store, and plans to expand its global sales force by 8-10% over the next year.

Last week the company announced that it was expanding its Escape Travel franchise business in Australia, due to demand from travel agents currently aligned to other networks. That may be bad news for the likes of Jetset Travelworld (ASX: JET), which is partly owned by Qantas Airways (ASX: QAN).

The one fly in the ointment, and possibly the reason that Flight Centre’s shares have been sold off today, was the company reiterating that it was likely to writedown the value of its goodwill in India and the USA, and could also writedown some legacy IT systems. At lunchtime, Flight’s shares had recovered somewhat to be down 0.4% at $52.03.

Based on earnings estimates for 2014, Flight Centre is currently trading on a prospective P/E ratio of around 19 times, but has been known to under-promise and over-deliver. By comparison, Corporate Travel Management (ASX: CTD) is trading on a forecast P/E ratio of 24 times. Flight is also sitting on a cash pile of $433 million, with debts of just $45 million.

Foolish takeaway

Flight Centre continues to defy its critics, growing despite online-only competitors. At this stage there seems no reason to doubt that the company can continue to grow earnings at around 10% each year, and Foolish investors might want to add this stock to their watchlist.

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Motley Fool writer/analyst Mike King owns shares in Flight Centre.

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