Thanks to a three-pronged attack from Brexit-related uncertainty, terrorist attacks and air traffic control strikes, today’s final results from £1.1bn cap travel giant, Thomas Cook (LSE: TCG) were never likely to be pleasant. After an awful 12 months, should the company’s loyal investors stick it out or get to the departure gate as soon as possible?
Tough year
Let’s get this over with. In the 12 months to the end of September, revenue at Thomas Cook dipped from £7,834m the year before to £7,812m. On a like-for-like basis, however, this represents a drop of £371m. Underlying profit from operations came in at £308m, down from the £310m in the previous year but again, on a like-for-like basis, this still amounts to a sizeable £41m drop once the currency boost from the decline in sterling is stripped out. Profits after tax slumped from £19 to £9m and underlying earnings per share declined from 8.9p to 8.5p.
Any positives? Well, aside from the beneficial impact of sterling’s slide, Thomas Cook’s efforts to shift away from destinations such as Turkey and North Africa have been fairly successful and helped soften the blow somewhat. Levels of net debt, despite almost identical to last year’s figure at £129m, nevertheless represent an improvement of £56m on a like-for-like basis. Although income investors will hardly be salivating at the prospect, the company’s decision to resume paying dividends after a gap of five years also suggests a degree of confidence from Thomas Cook’s board. Indeed, while remarking that it would be taking a “cautious approach to the year ahead,” CEO Peter Fankhauser also reflected that the company remained optimistic of achieving a full-year operating result “in line with market expectations.” Perhaps thanks to these reassuring comments, shares in Thomas Cook jumped by over 7% in early trading suggesting that the market feared worse news than it received.
Contrarian opportunity?
Can the good times return to Thomas Cook? Quite possibly. Bear in mind that this was the same company whose share price recovered from 14p in 2012 to 185p in March 2014, albeit under the steerage of former CEO Harriet Green. As to whether it’s worth waiting for this recovery, I’m not so sure. While shares in the travel operator are undeniably cheap on a forecast price-to-earnings ratio (P/E) of just under 7 for 2017, I think there are far more compelling opportunities elsewhere, even in the travel industry.
One such alternative is pureplay online operator On the Beach (LSE: OTB). In sharp contrast to Thomas Cook, a recent trading update from the £301m small-cap was undeniably positive. Despite operating in the same challenging market, On the Beach has been able to grow revenue by 18% to £36m in 2016. Thanks to more and more holiday-makers going online, the company also managed to increase its market share with daily unique visitors rising by 13% over the last year to 61m. While still a lot smaller than Thomas Cook, On the Beach is also expanding into international markets such as Sweden, suggesting it’s not willing to rest on its laurels.
On a forecast price-to-earnings ratio of just over 13 for 2017, shares in the Stockport-based business are certainly more expensive but, given its asset-light business model, are a far less risky bet in my opinion.