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Flight Centre down on price-fixing case — should you buy?

Flight Centre (ASX: FLT) shares dropped 8% in early trade on Friday after the Australian Competition and Consumer Commission (ACCC) won a court case against the online giant.

Flight Centre was found guilty of attempting to fix prices with international airlines to stop the airlines undercutting the company and reducing its margins. Investors took the opportunity to snare shares in the company at a reduced price and pushed the share price up 5% during the day to close at only 3% down.

The ACCC case relates to communications between Flight Centre and Singapore Airlines, Malaysian Airlines and Emirates between 2005 and 2009. Flight Centre was found guilty of attempting on six occasions to induce the three airlines to stop directly offering and booking international fares on their own websites at prices below that available to Flight Centre.

This was a problem because at the time Flight Centre had a price-beat guarantee that offered to beat competitor airfares by $1 and give the customer a $20 voucher. Lower prices from the airlines caused a problem for Flight Centre as it eroded margins.

Managing Director Graham Turner said that the company would consider fighting the ruling while it waits for the December 19 decision on whether any financial penalties should be applied.

Mr Turner said that he was surprised at the ruling, which will likely have wide-ranging impacts for the travel industry and parallel industries. Mr Turner believes that asking the airlines for access to all cheap flights is logical seeing as  Flight Centre provides a significant source of free marketing and advice to the travelling public.

Foolish takeaway

Even after the fall on Friday, Flight Centre has been a great performer in 2013, rising from $27 at the end of last year to over $52 in October and now rests at $46 after falling on Friday. This represents a rise of over 70% and as the charges relate to events between 2005 and 2009 the ruling is unlikely to have any impact on Flight Centre’s operations. Estimates on the financial penalty expected are few and far between, however Flight Centre’s excellent cash flow should mean that any reasonable penalty would be easily absorbed by the company’s profits.

Is Flight Centre still a 'buy'?

After rising by 70% in 2013, significant outperformance in 2014 will only come if the company continues its strong growth trajectory. Flight Centre is expected to grow profits by around 15% in 2014 and 8% in 2015, if it hits these targets the share price should continue to rise with the market. The forecast dividend yield of 3.3% is not huge however, so if you're more interested in a stock paying a big, reliable dividend, you should discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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