Why TUI AG is my top travel sector buy

Shares in FTSE 100 travel group TUI (LSE: TUI) edged higher this morning after the company reported a 15.5% rise in underlying earnings, and increased its dividend by 12.5%.

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This performance highlights the ongoing strength of the travel and leisure market. Fears that political events, shifting exchange rates, and terrorist attacks would cause a slump in this sector seem to have been exaggerated.

I believe TUI remains an attractive buy. In this article, I'll take a closer look at the group's latest figures. I'll also consider the attractions of one of TUI's major peers.

Strong profit growth

Most of us know TUI as the owner of UK travel operator Thomson, but in reality this is only one part of this large business. TUI operates in most countries in northern and Western Europe, plus Russia. The group runs 300 hotels in 24 countries, plus 136 aircraft flying to 180 destinations. TUI also has a sizeable cruise ship operation.

I believe today's results highlight the benefits of the group's size. Weaker performances in North Africa and Turkey have been offset by growth elsewhere. At constant exchange rates, TUI's total sales rose by 1.4% to EUR17,185m last year.

TUI has made some significant disposals over the last year, so some adjustments are necessary to achieve a like-for-like comparison of profits. The company says that on a pro forma basis -- adjusting for acquisitions and disposals -- earnings per share rose by 15.5% to EUR0.86, when measured at constant exchange rates.

Exchange rates have worked against TUI over the last year, meaning that the actual increase in earnings per share is more modest, at 2.4%. However, exchange rate factors tend to even out over time for large companies. I don't see this as a concern.

TUI said today that it expects to deliver average underlying operating profit growth of at least 10% per year over the next three years. The shares trade on a 2016/17 forecast P/E of 11, with a prospective yield of 5.1%. In my view, this could be a good time to take a closer look.

This market is booming

TUI's underlying operating profit from cruise ship operations rose by 60% to EUR130m last year. But the German firm is only a minnow when compared to the world's largest cruise ship operator, Carnival (LSE: CCL).

Carnival is currently expanding fast to meet the boom in demand in the cruising sector. Carnival operates brands including P&O Cruises, Cunard, Princess Cruises and Holland America. The group currently operates 101 cruise ships, with a further fifteen scheduled for delivery between 2016 and 2020.

The latest consensus forecasts suggest that Carnival's earnings will rise by 48% to $3.34 in 2016, with a further increase of 13% pencilled-in for 2017. This strong growth forecast puts the stock on a 2016 P/E of 15.5, falling to 13.7 in 2017.

Carnival shares have already risen by 18% over the last year, and this has pushed the group's dividend yield down to about 2.5%. I believe the shares could have further to climb, but investors will need to watch out for warning signs that the cruise market may be peaking.

Don't miss this potential triple bagger

TUI and Carnival could both deliver further growth. But if you're looking for stocks with the potential to double or triple in value, then I believe you need to look elsewhere.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.