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Should you buy Flight Centre Travel Group Ltd?

Although I take analysts’ recommendations with a grain of salt, Deutsche Bank has a “buy” recommendation on Flight Centre Travel Group Ltd (ASX: FLT) with a 12-month price target of $62 on the stock. Flight Centre currently trades at $53.

The “buy” recommendation comes on the back of a 7% increase in Australian outbound travel in February. The high demand for overseas travel from Australian consumers will undoubtedly continue to benefit the company, especially with the Australian dollar remaining near parity with the US dollar. Flight capacity in and out of Australia has grown by an astonishing 80% over the past decade.

Is Flight Centre a good long-term investment? Flight Centre has an extremely strong brand in Australia and a large and extensive store network with 1,300 stores which give the company substantial cost advantages over its competitors and allow it to benefit from a strong network effect. The company will continue to benefit going forward as Australians put aside more disposable income towards overseas travel as a consequence of cheaper overseas airfares and accommodation. A blended business model of retaining the traditional bricks-and-mortar travel agency, along with a comprehensive online offering has proven to be very successful.

Flight Centre is evolving from a traditional travel agent to what the company describes as “a best-in-class travel retailer”. The company’s long-term vision is to develop from an agent which deals with other suppliers products, to a retailer which is the brand and business consumers identify and decide to go with. This vision involves having clear areas of specialisation with category experts, coupled with unique product blends which can be adapted to meet the needs of consumers.

The company has also benefited in recent times from a continuing trend of companies outsourcing their travel needs to Flight Centre – a trend that I see continuing going forward given the comprehensive offering Flight Centre can offer.

Flight Centre has been a standout performer in the travel sector over the past five years with the share price increasing by 755%. This is compared to Wotif.com Holdings Limited (ASX:WTF) which has seen its share price actually decline by 28% over the same period.

Foolish takeaway

Flight Centre recently announced record results for the half-year ended 31 December 2013, with profit up 20.7% on the previous period. The increasing demand from Australians for travel should see the company perform strongly over the next decade. While trading on a price-earnings ratio of 20, the company is not overly cheap, however investors need to pay up for quality companies. Flight Centre would be a worthy addition to a long-term portfolio.

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Motley Fool contributor Bradley Murphy does not own shares in any company mentioned in this article.  

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