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Thomas Cook: despite the Club 18-30 malaise, is it a buy?

By Chris Bailey of Financial Orbit | Sunday 7 October 2018

Disclosure: I own shares in one or more of the stocks mentioned. 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.

I read in the Sunday press today that Club 18-30 is to close.  Even during the mooted target age range, i had zero interest in going on one of its holidays and the only reason I am talking about it now is that the brand is amazingly currently owned by the staid old travel company Thomas Cook (TCG).  
Thomas Cook shares have not been staid recently.  I last mentioned the company back in late July but unlike Greencore (GNC) and Centrica (CNA) which have both delivered some returns since for investors, Thomas Cook has had a shocker with the shares falling from a little under a quid to not much more than 50p (54p as per the Friday close).  Ugh...
As I mentioned back in late July, the ironic Achilles heel that the company mentioned back in late July was the better UK domestic weather which has inhibited the performance of the company.  And since then the news has not got any better - a pre-close update late last month upped the excitement levels further with the observation that 'since the last update has been tough, particularly in the Tour Operator, where our ability to drive margins in the 'lates' market has been further restricted by excess summer capacity'.  Damn that better weather! 
Winter 2018-19 holiday bookings have been fine so far but a 5% drop in this summer's pricing has hassled the profit expectation level a bit further down to a full year ebit of £280 million...and the company acknowledged that the next update in November may see further changes.  The aforementioned Club 18-30 hassles have clearly not been the only ones.  For example the CFO for the last six years - during which time the company has come from the brink before - announced at the end of November, he would exit into the night and the company needs to find a permanent replacement (it has announced an interim CFO). 
All has this has had a real impact on the price investors have been prepared to pay for the shares.  A travel agent's balance sheet is always subject to seasonal shifts but even assuming a bit of slippage, efforts over the last few years have at least kept Thomas Cook's balance sheet well away from the rocks of the dog days 5+ years ago when the company nearly did go bust.  Net debt was £40 million at the 2017 end of September results and I doubt if it is much, much worse.  All this means is that at less than a £1 billion EV the rating is right down to less than x4 EV/ebit.  That feels a bit rude. 
My view?  Unless you are very, very optimistic about the weather in the Northern Hemisphere over upcoming years, are very worried about ongoing consumer ability to go on holiday (when surveys indicate it is one of the last aspects they cut, certainly way after many other aspects of discretionary consumer expenditure) OR you think that travel is going to be horribly constrained by some post-Brexit passport bust-up, the fear factor is very high here.  Their great pan-European peer TUI (TUI) held itsnumbers recently for example.  Exiting the Club 18-30 business is not the only aspect of Thomas Cook that is attracting me at the moment.  BUY. 

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