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Why Flight Centre Travel Group Ltd is up 50% in 2017

Shares in Flight Centre Travel Group Ltd (ASX: FLT) edged 1% ahead in morning trade to $47 after the travel agency forecast an underlying profit before tax between $350 million to $380 million for financial year 2018, which would be 6%-16% above FY 2017’s result.

The group’s CEO also told today’s AGM that the business was “performing well” with expectations it will hand in a profit before tax between $120 million to $135 million for the six-month period ending December 31 2017, which would be 6%-19% above the first half of FY 2017.

Flight Centre is cycling off a weak prior corresponding half that was characterised by cheap airfares underpinned by plunging fuel prices as oil entered a bear market.

Today, the group cautioned that international airfare prices “appear to have stabilised” and with no futures market for airfare tickets (unlike oil) the group’s margins remains vulnerable to a structural decline in oil prices and jet fuel costs.

Profit in Australia is expected to be slightly down compared to the prior corresponding half due to heavy investment in the local business, with the “international businesses expected to be the key growth drivers”.

The group updated that its corporate travel businesses in North America and Australia continue to perform well as global growth picks up, while leisure travel markets have been softer.

Some of the investment in Australia is being made in digital platforms, with 8.4% of the stock still shorted by traders speculating that online competition will take market share from the business.

Outlook

Based on forecasts for profit growth around 10% in FY 2018 analysts expect earnings per share to come in around $2.50, which means the shares change hands on 19x estimated forward earnings.

The estimates could prove wide of the mark to the upside or downside however, with much depending on Flight Centre’s performance over Christmas and the six-months ending June 30 2018.

Given the recent volatility in its operating performance I’m not a buyer of shares at today’s valuations and would prefer the largely online-only business models of smaller rivals like Webjet Limited (ASX: WEB) or Corporate Travel Management Ltd (ASX: CTD) as investment options.

On current valuations Webjet may be a solid opportunity if it is able to deliver 3-5 more years of double digit compounded annual growth rates.

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Motley Fool contributor Tom Richardson owns shares of Corporate Travel Management Limited and Webjet Ltd.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Corporate Travel Management Limited and Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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