Flight Centre Travel Group Ltd (ASX: FLT) is up 14% so far in 2014, and up 60% over the past 12 months. It’s currently trading on a trailing price-to-earnings ratio (PER) of 23 and an estimated forward PER of 20, well above its long-term average and that of the broader market, however I still believe long-term investors will see good results from here. Here are three reasons why I believe Flight Centre will continue to be a favourite of Australian investors:
1. Its incredible track record
While all Foolish investors know that past performance is no guide to future returns, investors and rivals everywhere marvel at the ability of Flight Centre’s management to deliver market-beating results year after year. In both August 2013 and February this year, Flight Centre released results that smashed broker estimates and resulted in a spike in the share price.
Since listing in 1980 at 95 cents per share, Flight Centre has expanded operations to more than 2,500 retail stores in 11 countries and the share price now sits above $54. While earnings were squeezed during the GFC, Flight Centre recovered impressively, growing earnings from 98 cents per share in 2009 to 244 cents in 2013. This corresponds to a 150% gain in four years in the face of adverse economic conditions, and highlights the amazing ability of the company’s management to deliver spectacular returns to shareholders.
2. Its growth profile and dividend yield
Analysts are forecasting 10% annual earnings growth for the next three years, however the company could again surprise to the upside through its international operations. Currently around 40% of revenue is generated offshore, however it only contributes 20% of earnings, indicating that the company has scope for margin expansion. Additionally, based on the current share price, analysts are forecasting a yield of 3.1% fully franked in 2014, and 3.4% in 2015. When grossed up to 4.4% and 4.9% respectively, Flight Centre’s yield is comfortably above term deposits and many other stocks considered attractive because of their growth characteristics.
3. Its dominant domestic market share and solid financial position
Flight Centre is the dominant travel brand in Australia and international airlines in particular are reliant on the company for sales and marketing. Flight Centre’s mix of physical stores and online presence makes it difficult for competitors to take meaningful market share and with net cash of $357 million at the start of the year, the company is well capitalised to squeeze competitor margins if required.
The best companies always seem expensive. Sure, buying during the GFC at a little over $3 a share would have been an exceptional investment but we can’t all be that lucky. Flight Centre remains priced for significant growth over the next three to five years, but based on past experience and the quality of management, if any company is going to achieve it, Flight Centre will.
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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned
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