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A stock picker’s guide to Flight Centre Travel Group Ltd

Flight Centre Travel Group Ltd (ASX: FLT) is the biggest travel and tour reservations company in Australia. This $4.6 billion company recently upgraded its franchise model while keeping up-to-date and ahead of the pack for online reservation services.

Its market and competitors

Well known as a travel agency business, it can make reservations for both domestic and international flights, holiday packages and corporate travel. According to the IBISWorld market research website it has the largest market share of the travel agency and tour services industry in Australia at about 41%.

Helloworld Ltd (ASX: HLO), formerly Jetset Travelworld, holds the second spot with 27% of the market and $326 million in revenue for 2013. Following next is Webjet Limited (ASX: WEB) with $74 million in revenue.

Internationally, the company operates in the UK and the US, the world’s biggest travel markets, as well as in Europe, Africa, Canada, New Zealand and the Middle East. 40% of its revenue comes from the overseas markets.

It operates under 30 brands such as Escape Travel, Student Flights, Travel Associates and Cruiseabout. Its corporate travel business is FCm Travel Solutions, which was recently named the World’s Leading Travel Management Company for the third year in a row by the World Travel Awards organisation.

Financial track record

The company has been growing its NPAT before abnormals by an average compounded rate of 13.3% annually over the past 10 years, with a 23% increase in 2013 over 2012. Over the same time period, revenue has more than tripled from $606 million to $1.9 billion.

It generally pays out about 50%-55% of earnings as dividends, and from its 2013 adjusted EPS of 244.2 cents per share (cps), it paid a total of 137 cps in dividends fully franked.

Its long-term debt is only $2.64 million as of 30 June 2013, and compared to its 2013 NPAT of $246 million, its financial gearing is solid and its free cash flow went from $200 million in 2012 to $343 million in 2013.

The strong cash generation is funding its franchise expansion domestically as well as in the US and UK.

Expansion plans

The corporate travel business has very attractive profit margins, and the company wants to capitalise on that with its business presence now in 15 US cities, which generates about 40% of all total transaction value from the US. The new hyperstore format shops are opening more in the US and UK. UK shops and businesses are expected to grow in number by 11% during 2013/2014.

Overall the total sales network is projected to grow by 8%-10% during 2013/2014. Its profit guidance for 2013/2014 is $370 million – $385 million in profit before tax (PBT), up from 2013’s $349 million.

Foolish takeaway

Concerns about surviving against pure online service companies have been allayed with strong year-on-year revenue and earnings growth, and a share price that has risen from about $20 to $46.08 over the past two years.

By innovating its brand, store formats and online reservations portal, its strength and leadership in the industry has grown, and the extra earnings that it has been throwing off allows it to keep up the pace, and take on the larger US and UK markets.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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