Today’s pre-close trading update from Thomas Cook (LSE: TCG) is somewhat mixed. The company has experienced a decline in bookings. However, when specific destinations are excluded from this, such as Turkey, its performance is much stronger. Crucially, today’s update provides clues as to whether Thomas Cook is a better buy than travel and leisure peers easyJet (LSE: EZJ) and British Airways owner IAG (LSE: IAG).
Thomas Cook’s bookings fell by 4% versus the prior year. However, this figure was dragged down by reduced demand for holidays to Turkey. Holidaymakers have avoided the country due to fears surrounding terrorism in the region, as well as the attempted military coup that took place recently. With Turkey excluded from the bookings figures, Thomas Cook’s bookings rose by 8% versus the prior year.
Looking ahead, profit guidance for the full year is unchanged. Its winter bookings are in line with last year and it’s focused on improving the customer experience. It expects to deliver substantial progress in its new operating model, which includes the launch of Thomas Cook China.
In terms of profit growth, it’s forecast to record a decline in earnings of 7% this year. While disappointing, it’s expected to reverse this next year with growth of 23%. This puts it on a price-to-earnings growth (PEG) ratio of just 0.3. This indicates that Thomas Cook has a sufficiently wide margin of safety to merit investment at the present time.
This rate of growth is superior to sector peers easyJet and IAG. In the case of IAG, its earnings are due to rise by 17% this year, followed by a fall of 4% next year. This puts IAG on a PEG ratio of 0.4 for the current year, which is slightly higher than that of Thomas Cook. Similarly, easyJet’s bottom line is due to fall by 23% this year before rising by 6% next year. easyJet has a PEG ratio of 1.5, which is higher than for both of its sector peers.
The dividend issue
Clearly, the outlook for the travel and leisure sector is highly uncertain. Brexit could cause a further deterioration in demand for holidays if unemployment rises and economic growth stalls. In such a scenario, it may be beneficial to own stocks that pay out relatively high dividends. That’s because they may prove to be more defensive as well as offering a better return in the short run through their higher yield.
Thomas Cook’s yield of 1.6% is relatively disappointing, although it could increase in future since dividends are covered 7.8 times by profit. IAG’s yield is better at 5%, with a high dividend coverage ratio of 3.8. However, easyJet has the most appeal when it comes to income prospects due to its yield of 5.3%, which is covered twice by profit.
This means that while easyJet is the most expensive of the three stocks, it could prove to be the most appealing during a difficult period. That’s especially the case if budget airlines become more popular during a challenging economic period. As such, with its higher yield and budget offering, easyJet is the pick of the three travel leisure stocks, although IAG and Thomas Cook remain worthwhile long-term buys too.
