To say that the Thomas Cook (LSE: TCG) share price has fallen off a cliff in the past year is an understatement. After hitting its lowest levels since 2011 in May, the price wasn’t even one-tenth of the highest seen during the past year. While it has recovered quite a bit since, I think this story bears unravelling to figure out if the share can bounce back to past highs.
Selling the business
First, the latest news. The company’s tour operating business could be bought out by China’s Fosun (the Club Med owner and already TCG’s biggest shareholder). Investors quickly gave their approval, as the share price sharply rose by 17% following the announcement of talks even though the price is still fairly subdued compared to past levels.
However, the price is yet to recover from the lows it hit following the half-year results announcement that showed a dismal performance, bringing the price tumbling down by a sharp 40%. The company reported a decline in revenue and gross profit and a rise in net debt. I found the reasons given for margin decline particularly disappointing which, in the company’s words, were a “higher cost inflation and competitive trading environment”. Full points for honesty, but this just doesn’t sound like a substantial enough argument to merit such a weak result. The outlook isn’t inspiring either.
The next obvious question is – what’s the investor’s takeaway? I’m not entirely convinced if the price can bounce back yet, especially given that any Fosun deal isn’t exactly going to be smooth sailing.
If I was really keen on investing in the tourism business, the finance and travel company, Saga (LSE: SAGA), sounds like a better bet, although it’s not in the best place ever. But it’s doing better than Thomas Cook and I’m optimistic about its future. The share price hit all-time lows in the past week, a trend since April when the company announced its preliminary results for the year ending January 31. After it posted a loss, the share price fell by 37% and hasn’t found its confidence since. In fact, it hit the lowest levels ever this week on the announcement that CEO Lance Batchelor will retire.
For all its troubles, I don’t see Saga as a write-off, however. While it’s not making profits, its operating cashflow is improved from last year and its net debt-to-earnings ratio hasn’t increased either. It has also recently announced a partnership with Goldman Sachs’ retail bank, Marcus, for the over-50s segment that it specialises in. City analysts put a buy or, at worst, hold on the share, but there are no sell recommendations in sight yet.
It’s worth bearing in mind that the travel business is part of the consumer discretionary segment. Thomas Cook has already said that Brexit has potentially impacted its business. And that’s possibly the case for Saga as well. And this, when the Brexit story is yet to play out fully. If the shaky performance of both companies now is anything to go by, the sector is avoidable. But taking a longer-term view, I’d go for Saga rather than Thomas Cook, for sure.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.