Monday’s news that travel company Monarch has gone into administration has caused severe disruption for passengers, as well as the potential loss of jobs for its 2,100 workers. Of course, the company has been struggling for some time. It reported a £291m loss last year as reduced demand for its services following terror attacks in North Africa and the depreciation of the pound put its financial situation under pressure.
Looking ahead, could there be more difficulties in the wider travel sector? Could these two stocks be worth buying or avoiding right now?
Growing profitability
In response to Monarch going into administration, online retailer of beach holidays On the Beach (LSE: OTB) released an update to investors on Monday. It stated that it is contacting customers that are currently in resort in order to assist with their return travel, while also contacting customers who are due to fly with Monarch in future.
On the Beach anticipates that there will be a one-off exceptional cash cost associated with helping customers to organise alternative travel arrangements, or to provide refunds. This could hurt its profitability in the current year, although the business has no exposure to Monarch Holidays bookings, since it only offered Monarch Airlines seat-only flight options.
Looking ahead, On the Beach is forecast to post a rise in its bottom line of 34% in the current year, followed by additional growth of 28% next year. While these figures may be revised downwards due to the one-off costs associated with Monarch, the overall investment picture for the business remains strong. It trades on a price-to-earnings growth (PEG) ratio of just 0.6 and this suggests that it could offer high growth potential in the long run.
Improving outlook
Also offering investment potential within the travel sector is TUI (LSE: TUI). The company is one of the largest travel businesses in the world and this could mean it is better able to survive further challenges within the industry. According to its most recent update, it is making impressive progress with its strategy and is forecast to post a rise in its bottom line of 33% this year, followed by additional growth of 9% next year. This puts it on a PEG ratio of just 1.2.
Clearly, the travel industry is highly cyclical and no company is completely immune to financial difficulties. However, with the European economy showing signs of strength after significant monetary policy stimulus, the prospects for the industry may be relatively encouraging. Furthermore, with TUI having a business model that is relatively diversified, its overall prospects may be impressive.
As well as its growth and value appeal, TUI also has upbeat income prospects. It has a dividend yield of 4.5% from a shareholder payout that is covered 1.7 times by profit. This suggests that it could be a popular income share for the long run.
