Thomas Cook has seen more than £1bn wiped off its value over the year: Is it time to get away from the travel giant?
The unrelenting summer sun has begun to feel like a distant memory – except for travel companies.
A heatwave that saw millions basking in their gardens, parks or at the seaside here rather than book a last-minute getaway was bad news for High Street travel agent Thomas Cook.
It has seen more than £1billion wiped off its value over the year.
Thomas Cook has seen more than £1billion wiped off its value over the year
Now, with most of the sector in the doldrums, shareholders might wonder if it is time to take a break from the industry or whether the cheap shares are a bargain to be snapped up.
Thomas Cook had welcomed 2018 with the best of hopes, increasing its fleet of aircraft to 100 and expanding capacity across the business to pull in as many customers as possible. But the cracks were showing as early as July.
In an update to investors that month, it said the ‘sustained period of hot weather’ had halted bookings, making it harder to rake in profit from the ‘lates’ market where customers book at the 11th hour.
As the sun beat down, Thomas Cook’s woes intensified. In September it said operating profit would be down at around £280m, or 13pc lower than the general expectation at the time.
Towards the end of November, two days before its full-year results came out, this was marked down again to £250m. Its debt pile also ballooned, from £40m to £389m in just 12 months.
The dividend was put on ice and analysts raised fears the company didn’t have enough cash to honour its lending agreements with banks.
Chief executive Peter Fankhauser admitted it had been a ‘disappointing year’.
It all came to a head this week with Thomas Cook being booted out of the FTSE 250.
Investors have also backed away from rivals Tui and On The Beach, giving their shares a battering as On The Beach joined Thomas Cook in exiting the FTSE 250.
But Helal Miah, an investment research analyst at broker The Share Centre, believes the outlook for travel firms and their shareholders isn’t as grey as it might appear.
‘I would take an optimistic view,’ he says. ‘I don’t think Thomas Cook should cloud investors’ judgment on the rest of the sector, especially towards the likes of Tui.’
He believes Tui, which generates a lot more revenue from Europe so is less susceptible to a UK downturn, is better managed and has more flexibility when dealing with fluctuating numbers of holidaymakers.
Chief executive Peter Fankhauser admitted it had been a ‘disappointing year’
Andrew Herberts, head of private investment management at Thomas Miller Investment, believes there could be a couple of big bankruptcies in the travel sector over the next year.
So this would be an interesting time to invest in the companies that survive, he says, since investor confidence and therefore share prices would be low. Added to that, the remaining firms would have less competition.
As for Thomas Cook, it is adamant that it has enough spare cash to fulfil its banking agreements. But Patrick Coffey, an analyst at Barclays, says: ‘There are multiple assumptions required [to accept this]. We remain on the fence.’
Coffey has been backing Tui over Thomas Cook for most of the year. He believes Tui shares, which are down 29 per cent over 2018, have been unfairly tarred with the same brush as its less fortunate peer.
In 2011, the last time Thomas Cook had real troubles with its balance sheet, Tui was also dragged down but soon rebounded, rewarding investors who took a chance on it.
For anyone who has shares in Thomas Cook, it could be a bumpy ride over the next year. Selling now could book a hefty loss. And if the company does pull through its troubles, shares should gain ground again.
It certainly needs a strong year – Fankhauser will be hoping for a traditional, rainy British summer.