Thomas Cook‘s (LSE: TCG) recent results showed a smaller quarterly loss: although it is not the best of times for the travel operator, one may well argue that its shares could be an opportunistic bet in the 115p-130p range!
But will Thomas Cook shares also deliver more stable returns than those of more cyclical stocks such as BG Group (LSE: BG) and BP (LSE: BP) into 2016? Thomas Cook is flat year to date, while BG and BP are up 12.8% and 10.7%, respectively.
Why so?
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Here are a few things you should know about these three companies’ prospects.
Thomas Cook Is Less Risky Than In The Past
Now trading at 126p, Thomas Cook stock could easily change hands some 15p to 25p higher than its current level later this year — say, by the end of the third quarter.
This is a speculative trade rather than a long-term value proposition, in my view, even though management is making good progress with regard to the company’s debt position, and comparable quarterly figures should be easy to beat in 2015, particularly if current trends for exchange rates continue and Thomas Cook’s core profitability rises in the UK. Thomas Cook’s performance in Continental Europe will likely continue to be volatile due to tough trading conditions and downwards pressure on prices, while other factors, such as hefty payouts for delayed and cancelled flights, could impact its future valuation.
The shares, however, trade below 4 times on a forward adjusted operating cash flow basis, which renders them rather attractive. Moreover, Thomas Cook operates in a sector where consolidation is on the cards, as proved last week by news that online travel company Expedia would buy Orbitz Worldwide for about $1.3bn in cash.
BP & BG…Appealing Long-Term Value Propositions
Low oil prices punish shareholders of BG and BP, yet neither stock should be considered riskier than Thomas Cook, one reason being that BP and BG assets could easily attract bids at or above fair value, while shareholder-friendly activity should not be ruled out, either.
While I expect BG to be more volatile than BP, upside for BG shareholders should be greater into 2016, based on restructuring potential and fundamentals vis-a-vis several trading metrics. BP’s trading multiples and fundamentals signal that investors may have overreacted to recent news and projections concerning oil prices, particularly because cuts to heavy investment will likely preserve the payout ratio, although many analysts seem to disagree.
Since its shares traded below 400p, I have pointed out that BP could easily rally to at least 500p (10%+ upside from its current level), but a fair value in the region of 1,100p (13% upside) is not out question for BG. At BG, new boss Helge Lund has joined a month earlier than expected: his strong ties in the marketplace will likely allow BG to carry out key divestments, which are pivotal to value creation and to support the payout ratio into next year.
