It’s not easy being a UK-based holiday operator in 2019. Just ask Thomas Cook (LSE: TCG) and any investor still clinging to its shares.
At the close of play yesterday, the former travel titan’s share price was down 85% from one year ago thanks to a spate of profit warnings and ongoing political and economic uncertainty.
Today’s interim numbers, while never likely to be pretty, haven’t helped matters. The stock is being hammered once again as I type.
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Is the writing on the wall for the former FTSE 100 constituent?
Battered by Brexit
Despite revenue of just over £3bn in the six months to the end of March being “in line” with that achieved last year, an underlying loss from operations of £245m was reported due to margin pressures.
All told, the company booked a £1.46bn pre-tax loss after also writing down the value from the merger of its UK business with MyTravel 12 years ago.
Reflecting on today’s results, CEO Peter Fankhauser stated that there was “little doubt” that the uncertainty around our EU departure had stopped UK customers from booking their summer holidays.
Ominously, the mid-cap also stated that promotional activity, combined with higher hotel and fuel costs, would put a drag on profits for the full year.
News of “good progress” elsewhere — such as multiple bids for its airline business, the opening of 12 hotels and progress on joint ventures in China and Russia — did little to stop the flood of sellers.
It’s clearly no surprise that Thomas Cook is now making every effort to reduce costs where it can.
A total of 21 retail stores have been shut so far with a review of its foreign currency business also under way.
Separately, the company has now agreed to a £300m bank facility with its lenders to help it through this winter. Worryingly, net debt already stands at £1.25bn with the company valued at only £350m yesterday.
Perhaps unsurprisingly, I’m not a fan of the shares, even if they were trading on a little over 3 times forecast earnings before markets opened.
While there will always be some bargains out there, I suggest that Thomas Cook isn’t one of them.
It might not be doomed but I’ll be leaving this one to the traders.
Better prospects
Of course, there are better bets for those committed to investing in the sector. Online operator On the Beach (LSE: OTB) is an example.
Despite enduring the same uncertainties as Thomas Cook, the company reported a 41% jump in revenue (to £63.5m) and 14% increase in adjusted pre-tax profit (£15.7m) in its half-year figures on Tuesday. An 18% hike to the interim dividend was also announced.
It wasn’t all sunshine and smiles. Although only a small part of the business, revenue from overseas fell by 56% to just £400,000 after the Icelandic airline Primera Air collapsed into administration in October.
While a larger company than it was a few years ago, much of On the Beach’s appeal remains its flexible business model and the lack of huge costs that come from running hotels and keeping aircraft maintained.
That said, prospective buyers should consider just how likely it is that this advantage might be eroded by rivals over time, not to mention the cyclicality of the travel stocks generally.
Currently, On the Beach’s shares change hands for 18 times forecast full-year earnings.
