The market seems to like today’s first-quarter trading statement from holiday airline and tour operator Thomas Cook Group (LSE: TCG). The shares rose more than 15% in early trading.
To put things in perspective, 2018 was a terrible year for the stock and it plunged around 80%. That was fuelled by two profit warnings, escalating borrowings, and a slashed dividend. The company has problems, and the valuation had been languishing at a low level to reflect that reality.
Even now, with the share price bobbing around close to 35p, the forward-looking price-to-earnings ratio for the trading year to September 2020 is below four. Although if you look at the enterprise value, which accounts for all the debt, the rating almost doubles. So the valuation isn’t as low as it appears at first glance.
Tough trading
Nevertheless, today’s action demonstrates how responsive investors are to news from the company. In the three months to 31 December, revenue rose 1%, which delivered an underlying operating loss of £60m, up £14m on the loss the firm posted in the equivalent period last year. That sounds horrendous. But in fairness, the firm’s profitability seems to be skewed to summer trading. But even that situation didn’t stop it plunging into a net loss of some £163m last year, so slippage on profitability now looks like a grim position to be in.
The company puts the weakness down to ongoing “highly competitive” market conditions at the end of the summer season in the UK, and weaker demand for winter holidays in the Nordics. Most of the damage occurred in the company’s tour operator arm, which experienced weak trading in the UK and Northern Europe. But that was offset to some extent by a “good’ performance in Continental Europe. Meanwhile, the airline arm performed well, the company said, because the seasonal loss it produced was the same as last year’s “strong comparative.”
Worrisome debt
I prefer to invest in firms that enjoy profitable trading whatever the season. It’s starting to look to me that Thomas Cook’s business is just, well, not very good. As much as I enjoy going away on holidays, I don’t think the tour and travel industry is the best to back up my wealth-generating investments.
The figure for net debt stood at a massive £1,588m on 31 December and the firm said it met its bank covenant tests on that date. But the fact that the directors felt the need to mention bank covenants at all raises a big red warning flag for me. Debt is uncomfortably high, and if trading falls off a cliff, such as during some future recession, those covenant tests could fail.
Thomas Cook tells us it’s addressing some of its 2018 challenges by reducing committed airline capacity for 2019 and increasing its focus on “high quality, higher-margin hotels and destinations.” On top of that, there’s the usual line about bearing down on costs that troubled companies often use.
I wouldn’t attempt to execute a long-term buy-and-hold investment with Thomas Cook and its cyclical, often-troubled business, but there could be potential in the shares for me to open a shorter-term position. However, I view the shares as ‘risky’, despite the potential for a profit rebound.
