Another week, another plunge in the shares of Thomas Cook Group (LSE: TCG). I reckon the catalyst for recent falls was the half-year results report delivered on 16 May. It showed slipping revenue and profit margins, an escalating underlying operating loss, and massive impairment of goodwill generating a gargantuan loss from operations.
On top of that, the accounts revealed mushrooming net debt and a more than 40% increase in the outflow of cash from operations up to a massive £693m over the six-month period. Thomas Cook is doing the opposite of what a business should be doing. Whichever way you look at things, the firm is losing money instead of making it.
Does it have comeback potential?
However, highly financially geared cyclical companies like this can stage dramatic and fast share-price recoveries and I must own up to having played the upside swing in the shares before. But is this another opportunity to dive in for the upside potential or have the company’s operations deteriorated too far this time? I fear that this time the share could be a dead duck and this may be one crash too far.
I last wrote about the firm in February when the shares were at 35p and said back then I wouldn’t attempt to execute a long-term buy-and-hold investment with Thomas Cook because of its “cyclical, often-troubled business.” I did wonder if there could be “potential in the shares for me to open a shorter-term position.” But I concluded then that the shares were “risky”. That risk came home to bite because profits are still falling and the stock is much lower now.
A grim outlook
There isn’t much cheer in chief executive Peter Fankhauser’s words in the half-year report. He described an “uncertain consumer environment across all our markets.” Factors such as last summer’s long heatwave and “high prices in the Canaries” reduced demand from customers for winter sun, “particularly in the Nordic region.”
He also thinks the Brexit process is stuffing the company because many in the UK are delaying their holiday plans for the summer. I think that’s a good point because the weak pound means that foreign holidays are more expensive than they used to be.
The outlook is grim. Fankhauser said in the report that ongoing “competitive pressure” resulting from consumer uncertainty is affecting the firm’s margins. On top of that, higher fuel and hotel costs are further headwinds likely to affect progress over the rest of the trading year.
Piling up debt
Meanwhile, the cash is flowing out of the business and the debts are piling up. I’m beginning to think Thomas Cook could be a serious Brexit casualty. All it would take is a general economic downturn and we could see the firm bust, or coming back to the market to raise more funds. I think the shares are extremely risky and I wouldn’t touch them with a bargepole now, despite past trading successes I’ve enjoyed with the stock.