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Love holidays, love Thomas Cook?

By Chris Bailey | Tuesday 13 February 2018


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Despite the multitude of cheesy ads on the TV begging us to book a holiday I use this regular slot for yet another confession: I have never been on a package holiday. To be honest, I doubt if I ever will...but fortunately the UK economy rolls on consumption preferences far different than my own. Which brings us to the recent comments by both Thomas Cook (TCG) and TUI (TUI), both big players in the travel market.

It was over twenty months ago when I last opined about the former - and that worked out pretty well. A week ago in its first quarter update it observed:

"From all that we see so far, customers' appetite for a summer holiday abroad shows no sign of slowing down. We've taken early action to meet strong demand for destinations in the Eastern Mediterranean. This has enabled us to shift capacity out of the Spanish islands where we have seen a continuation of the margin pressures we experienced last summer, particularly for the UK market."

'No signs of slowing down'...yes...back to those excitable TV adverts again. It has also taken costs out over the last year and, extrapolating the above, is on course for about £250 million of operating profit this year which puts it on a forward multiple (EV/ebit) in the x7s.

That seems pretty exciting but beyond the important continuing ability (or not) of consumers to pucker up for their holidays there is the disruption from geopolitical events (Tunisia holidays are only just restarting for example), currencies and wild swings in working capital. My rule of thumb has been to only buy travel companies when prospectively they are trading below a x8 multiple. Thomas Cook still ticks the box on this account. Around the current 120p level I am pretty excited for the prospects for the share. You never know that minority Chinese shareholder might come good and buy the lot, after all the rise of the Chinese traveller remains the most compelling theme in global travel...

Meanwhile TUI came out with its first quarter update earlier today. Around five times the market cap of Thomas Cook, it is an Anglo-German behemoth. The tone of its comments was also positive:

'Looking ahead, Summer 2018 has started well. The programme is 35% sold, in line with prior year, with revenues up 8% and bookings up 6%. Growth is driven by higher bookings for Greece, Turkey and Cyprus... In the UK, where the programme is 41% sold, the rebrand continues to drive up unaided awareness of TUI. UK bookings are broadly in line with prior year (-1%), with average selling price up 3%.'

Even a bit of pricing power...nice (a theme also noted by Thomas Cook). It also formally reiterated its hopes for a 10% rise in operating profits. Put it together and this trade trades on a forward x8s multiple. No disaster but accentuated by the 4% rise in the shares today, a bit firmly priced for me today.

We all know the consumer is under pressure which is why it is important to focus on the pecking order of consumption preferences...and names which have big market positions, pricing power and ideally a good balance sheet. You also take a bit of a risk on the latter with travel companies but that's reflected in the valuations too. Thomas Cook it? I think I would recommend a buy again at or below 120p. Some technical support at this level too.


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