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Should You Buy Thomas Cook Group plc And Sell Greggs plc & William Hill plc?

A solid set of interim results from travel operator Thomas Cook Group (LSE: TCG) today was overshadowed by continued criticism of the firm’s handling of the deaths of two children from carbon monoxide poisoning in 2006.

Today, new chief executive Peter Fankhauser tried to make amends and draw a line under the tragedy, telling the FT that he was “deeply sorry about the deaths” and believed the firm could have “treated [the family] with more respect”.

Mr Fankhauser was not in charge at the time of the deaths, so investors will not be seeking to hold him to account for these mistakes.

Instead, he will be judged on his ability to return the business to a long-term stable footing after its stunning turnaround in the hands of Harriet Green, Mr Fankhauser’s predecessor.

Making progress

Thomas Cook’s business is extremely seasonal, so it reports last twelve month (LTM) figures alongside its first half results, to give a more realistic picture of the performance of the business.

On this basis, the firm’s first-half performance was encouraging.

Operating profit rose by 74% to £117m over the last twelve months, while the firm’s underlying operating margin rose from 3.0% to 4.1%. The firm says performance is in-line with management expectations. Assuming these are reflected in current consensus forecasts, this gives a forecast P/E of 12.9, falling to 10.0 in 2016.

That seems an attractive valuation, especially as Thomas Cook confirmed today that it plans to restart dividend payments in the 2015/16 financial year.

If Thomas Cook’s recovery is still gathering momentum, does it make sense to sell stocks such as Greggs (LSE: GRG) and William Hill (LSE: WMH) — which have already delivered big gains — and buy into Thomas Cook?

Should you switch?

Here’s how these three companies have performed over the last year, together with their forecast P/E ratings and yields for the current year:

 

Thomas Cook

Greggs

William Hill

1yr share price change

0%

121%

27%

2015 forecast P/E

12.9

23.3

16.8

2015 forecast yield

0%

2.1%

3.0%

While Thomas Cook has lagged the market, Greggs and William Hill have both outperformed the FTSE 250, which has gained 17% over the last year.

Greggs has been a particularly strong performer and is clearly a high quality company, with net cash and strong profit margins.

On the other hand, Gregg’s looks expensive. The baker’s shares currently trade on 23 times free cash flow. This valuation doesn’t appeal to me, given that earnings per share are only expected to rise by 6% next year.

William Hill looks a better bet. The bookmaker has an operating margin of 17% and generates a lot of free cash flow. The shares currently trade on just 12 times trailing free cash flow and offer a reasonable 3.0% dividend yield.

Buy, sell or hold?

If I held shares in all three of these companies, I’d be tempted to lock in some profits on Greggs and hold onto my shares in William Hill and Thomas Cook, perhaps adding a little to each position.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.