Thomas Cook (LSE: TCG) and Barclays (LSE: BARC) are very different businesses, of course, but recent events surrounding Thomas Cook point to plenty of downside for Barclays shareholders. Here’s why.Â
The sudden departure of Harriet Green, who led Thomas Cook for less than three years, seems to be the reason why Thomas Cook’s stock price has been highly volatile in recent days.
Of course, thin underlying margins leave the travel agent exposed to the vagaries of the global economy, but Thomas Cook’s financial position has materially improved in the last couple of years. Net debt almost halved to ÂŁ421m between 2012 and 2013, and trends point to a manageable net leverage position in the next year or so.
Thomas Cook is paying more attention to its short-term liquidity needs, which is also a good thing. Still, its stock slumped to almost 100p last week, trading around a 52-week low. Why so?Â
Only a few days ago, according to forecasts from brokers, Thomas Cook’s average price target stood at 200p — but that has now come down to 154p. Top-end estimates, meanwhile, have come down to 200p from 250p.Â
There has always been a problem with market consensus estimates for Thomas Cook, however: the spread between the mean price target from brokers and Thomas Cook’s stock price has widened from 8p to 100p between March and mid-October.
When this happens, either consensus estimates come down, or the shares starts to rally — or both plunge, but changes in consensus estimates tend to be more painful. The shares currently change hands at 125p, so the spread is roughly 30p.
Thomas Cook is a high-risk equity investment for opportunistic traders, yet based on fundamentals and trading multiples, its shares should be included in a diversified portfolio.Â
Barclays Rises…Â
The spread between the mean price target from brokers and Barclays’ stock price has significantly narrowed since it reach 70p earlier this summer, and now stands at 40p. As Barclays stock rallies (+18% since mid-October), little evidence suggests that Barclays has become a more solid investment proposition.Â
As in Thomas Cook’s case, it looks a lot like market expectations are too high. Brokers have become more bullish about Barclays in recent weeks, although the bank’s fundamentals have not significantly improved in recent times.
Meanwhile, headline risk is still something that could have a significant impact on the valuation of Barclays stock. Several problems remain unsolved: from unwanted assets held on the balance sheet and precarious capital ratios to a tough competitive and regulatory environment, which will not help the bank deliver long-term value to shareholders, in my opinion. Unless, that is, market estimates continue to rise….