December 12 saw a 16% one-day jump in the share price of the struggling travel giant Thomas Cook Group (LSE: TCG). During a speech at a travel conference, its chief executive Phil Gardner indicated a positive start to 2019 and investors rushed in.
Despite the upbeat tone of his words, it will take more than strong initial booking numbers for 2019 to turn the performance of the group around. Its fundamentals give investors cause for concern.
Company and UK-specific problems
The company has had a terrible 2018 as investors have severely penalised it following two profit warnings. In November it also suspended its full-year dividend, another valid reason for new investors to shy away from the shares when there are plenty of fundamentally strong companies that are also healthy dividend plays.
TCG’s forward P/E of less than 3.5 could initially make it a look like a value play. Nonetheless the group still has a high level of net debt at almost £390m and low margins. Investors may want to read between the lines of Mr Gardner’s speech: he said store closures would happen if the company could not turn the business around to deliver robust earnings with higher margins and profit.
I also believe that the effects of Brexit on overseas travel will continue in 2019 and as a result of a weak pound, more Brits are likely to travel domestically. If another warm summer shines upon us, I would expect more people to visit the beautiful Kent coast than go on a Thomas Cook holiday overseas where their hard-earned pound will not go very far.
Leading FTSE 100 alternative?
For now I am staying away from TCG and instead looking at InterContinental Hotels Group (LSE: IHG) — the global hotel management and franchising company. Its well-known brands range from InterContinental in the luxury segment to Holiday Inn Express in the budget group. Other brands include Crowne Plaza, Kimpton Hotels & Restaurants, and the recently launched voco.
In October, the group paid an interim dividend of 27.7p per ordinary share. Although the current yield of about 2% is on the low side for hospitality shares, its dividend cover of 2.8 would mean that investors do not need to worry about a potential suspension of dividends.
The Americas, especially the US, are InterContinental’s most significant centres of profits. China, where the hotelier is expanding operations, promises to become a highly attractive market thanks to growing corporate and meetings demand.
Management has been on a mission to increase the numbers of rooms in its franchise as well as the revenue per room. It has also been decreasing costs, adding to the bottom line. Much to the delight of investors, the group has been a top performer over the last decade.
However year-to-date its price action has been choppy and the shares are down from a 52-week high of 5,050p to 4,180p. Yet with the recent sell-off, the share price has become more attractive as a long-term investment. Its P/E ratio of 17 makes it a better buy than many of its competitors.
The bottom line on TCG and IHG shares
If you believe in the turnaround potential of Thomas Cook, 2019 may offer plenty of opportunities to go long the shares. But to me, due to its reliable past performance and the proactive style of management, IHG is a safer bet.
