The Thomas Cook (LSE: TCG) share price has been shooting up recently from its lows, which could tempt some back into the stock. But I’m cautious about the travel firm because the underlying business faces tough ongoing trading conditions.
Recapitalisation ahead
On July 12, the firm announced it is in “advanced discussions” with both its largest shareholder, Fosun Tourism Group, and with core lending banks, regarding a proposed recapitalisation.
The figures being mooted are frightening. Thomas Cook seeks a £750m injection of new money to see it through the 2019/20 winter season and to provide “the financial flexibility to invest in the business for the future.” But the price is high. Fosun will end up owning a “significant” controlling stake in the tour operating part of the business as well as a large minority interest in the airline.
On top of that, much of the firm’s external bank and bond debt will be converted into equity under the proposals. That’s grim for existing Thomas Cook shareholders who will be “significantly” diluted as a consequence of the proposed deal.
I’ve got to ask, why bother to save it? It’s not as if Thomas Cook is operating in a strong economic niche in a sector with a tailwind. In fact, the industry is characterised by fierce competition and cyclicality and is stuffed full of me-too operators all offering substantially similar and undifferentiated services.
Thomas Cook strikes me as a poor business operating in a challenging sector. So I won’t be bothering with the shares from now on. Instead, I’d look towards one FTSE 250 stock that stands out in the wider sector because of its persistent growth, and that’s airline operator Wizz Air (LSE: WIZZ).
Trading well and growing
Last month, the company delivered a blistering set of first-quarter results with 20% growth in passenger numbers, revenue up more than 25%, and net profit for the period a little over 40% higher.
Chief executive József Váradi explained in the report that higher fuel prices have been “supporting a stronger fare environment” and weaker carriers have been withdrawing unprofitable capacity from the market. But Wizz Air has been able to take advantage of the situation and raised its full-year capacity growth rate from 16% to 20%.
The company expects full-year net profit to come in between €320m and €350m for the year. But Váradi pointed out that the guidance depends on the revenue performance for the remainder of the “all-important” summer period and trading in the second half of 2020. Like all airlines, he said, there is “limited visibility.”
But Wizz Air is in far better shape than Thomas Cook, and the firm’s growth reflects in the performance of the share price, which at the current 3,532p, is up around 50% over the past 10 months.
Meanwhile, the forward-looking earnings multiple runs close to 12 for the trading year to March 2021. But there’s a big pile of net cash on the balance sheet to account for as well. The airline industry can be volatile, but Wizz Air is trading and growing well. I’d rather take my chances with the stock than with Thomas Cook right now.
