I have kept a close eye on FirstGroup (LSE: FGP), Rentokil (LSE: RTO), Royal Mail (LSE: RMG) and Thomas Cook (LSE: TCG) since 29 May, when I first noted that the shares of these four companies were among the cheapest in the UK. It’s been a roller-coaster ride for their shareholders, but is the tide turning?
Barring FirstGroup stock, whose performance has been poor all along the way, the shares of Rentokil, Royal Mail and Thomas Cook have bounced back in recent days.
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Thomas Cook: Where’s Fair Value?
The FTSE 100 index has lost 3% of value from its highs at the end of May.
Thomas Cook shares are down 25% since 29 May. But they have risen by 8.6% in the last five days of trading, for no apparent reason. What’s next?
Thomas Cook has the backing of its lenders, which won’t pull the plug if things get more complicated. There’s a lot to like in it. I reiterate the view that larger disposals should be pursued at a time growth in the sector is problematic.
I think Thomas Cook shares would be fairly priced at 160p, where they traded at the end of May. That implies upside in the region of 27%. But as I said a few weeks ago, much of Thomas Cook’s fortunes hinge on how the broader market performs, rather than on fundamentals.
Rentokil: Easy Does It
Rentokil shares are up 4.2% since 29 May, but investors who decided to bet on Rentokil at the end of June — when the stock traded at a three-month low — have recorded a paper gain of 11%. They are up 3.4% in the last five days of trading.
Rentokil is a turnaround story that may yield dividends if acquisitions were made to bulk up in the right places, and at the right take-out multiples. Divestments are likely, and will help Rentokil release value for shareholders.
I wouldn’t be surprised if Rentokil continued to beat market expectations, reporting better earnings per share in the next few quarters. Its valuation suggests a 5% to 10% upside to the end of the year.
Royal Mail: A Long-Term Value Play?
Since 8 August, Royal Mail shares have risen by 7.4%, but they are still down 14.8% since 29 May.
The shares trade at 441p, or about 30% above the price of 330p at IPO. They are still about 15p below the highest level they recorded during their first day of trading. It’s hard to figure out where Royal Mail’s valuation will go, but Royal Mail is a much more efficient and profitable business than in previous years.
Its trading multiples suggest further upside to the end of the year and into 2015. The threat posed by rivals in the parcel-delivery market is real, but Royal Mail’s cash flow profile is reassuring, debts are manageable, and profitability could surprise on the upside.
Elsewhere, FirstGroup shares are down 14% since 29 May, and are trading around their lows for the year. Shares of most companies operating in the sector have rallied beyond fair value in the first half of 2014, and will struggle in weeks ahead if volatility makes a comeback. In this context, FirstGroup is the less obvious choice, although I still believe it could offer value if consolidation in the sector speeds up.