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Head to head: TUI AG vs. Thomas Cook Group plc

Shares in package holiday giant TUI (LSE: TUI) rose by 7% this morning after the firm reported a third-quarter operating profit of €194m.

The firm’s strong results came despite a £10m loss stemming from the terrible events in Tunisia and a warning of difficult market conditions in Greece.

TUI’s smaller peer Thomas Cook Group (LSE: TCG) hasn’t fared so well. Since Thomas Cook released its third-quarter results on 30 July, the firm’s shares have fallen by 8%.

These differing performances shouldn’t be a big surprise.

Thomas Cook reported a 4% rise in like-for-like sales and a 5% increase in underlying operating profit for the three months to 30 June. The equivalent figures for TUI were +6% and +18%, highlighting the larger firms superior profitability.

Indeed, despite Thomas Cook’s impressive turnaround in the hands of former CEO Harriet Green, it remains a work in progress. Debt levels are high and Thomas Cook’s 1.5% operating margin is less than half the 3.4% achieved by TUI.

Given this, which firm should investors looking for value, income and growth choose?

1. Value

Neither firm is an obvious value buy. TUI shares trade on around 19 times 2015 forecast earnings, falling to 14 in 2016. That may be a fair price, but I don’t think it’s cheap.

At first glance, Thomas Cook shares appear to be cheaper. At the current share price of 115p, Thomas Cook boasts a 2015 forecast P/E of 13, falling to about 9.5 in 2016.

However, two factors count against Thomas Cook here. I’ve already mentioned its much smaller profit margins. The second factor is that Thomas Cook has net debt of £392m, which represents net gearing of 300%, compared to about 17% for TUI, based on today’s Q3 figures. 

I’m not sure either of these companies is a traditional value buy, but I might be inclined to choose Thomas Cook as a turnaround buy. The firm has made considerable progress in reducing its debt pile and if this continues, could start to look stronger.

2. Income

The choice here is very simple. TUI has a much stronger balance sheet and a prospective yield of 3.6%. The dividend is expected to be covered 1.5 times by earnings this year, which is reasonable.

In contrast, debt-laden Thomas Cook must prioritise debt repayments. The British firm only offers a forecast yield of 0.6% for this year, although this is expected to rise to 2.9% in 2016.

However, TUI’s well-funded and readily available payout looks more appealing to me.

3. Growth

TUI’s earnings per share are expected to rise by 42% this year and by a further 30% in 2016, putting the firm on a reasonable 2016 forecast P/E of 14.

In my view, the German firm is the more attractive buy for growth, and the market seems to agree. Consensus earnings forecasts for TUI have stayed firm over the last three months, whereas those for Thomas Cook have been cut by 25% over the same period.

The winner

TUI appears to be a clear choice for growth and income, although Thomas Cook may appear to investors looking for a recovery play.

However, if you're thinking about buying shares in either company, I'd urge caution.

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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.