Since hitting an all-time low of 8p in May, the Thomas Cook Group (LSE: TCG) share price has risen and was trading at about 14p, at the time of writing. Is it time to start taking a fresh look at this historic firm?
Unfortunately, I don’t think so. I’ll explain what I think will happen next, and why I’m still avoiding TCG stock.
This can’t continue
Thomas Cook has suffered from poor trading this year. But the real problem is simply that the company has too much debt. Even though it has received £2bn in advance payments from customers, borrowings have still risen as trading has slowed.
Over the 12 months to 31 March, Thomas Cook paid £122m in interest costs but only generated £30m of cash from operations. The firm’s latest balance sheet shows total liabilities of £6,371m and total assets of just £5,026m. This suggests that the firm may be insolvent. Without a refinancing deal, I don’t see how Thomas Cook can continue trading.
Two possible solutions
One solution might be for the company to raise cash by selling new shares. But the shares have fallen so far that this isn’t a viable option. The only realistic choice I can see is for the firm to do a deal with its lenders.
One option would be for the company to swap some of its debt for new shares. This would give lenders majority ownership — probably more than 95%, in my experience. The value of existing shares would fall to almost zero.
However, what seems more likely at the moment is that assets will be sold, raising cash to repay debt. According to recent statements, Thomas Cook is in discussions with various parties about selling its airline, its Northern Europe business and its entire tour operator business.
If these sales go ahead, the current listed company will be an empty shell, worth nothing. I’d expect the shares to go to zero.
Just don’t do it
Here at the Motley Fool, we have a responsibility to take a balanced view of potential investments.
But even with my balanced hat on, all I can say is that I believe buying Thomas Cook shares is a reckless gamble. I would sell this stock today.
What I’d buy instead
Globally, I expect the leisure travel sector to continue growing for the foreseeable future. One of my favourite stocks in this sector is FTSE 100 cruise ship operator Carnival (LSE: CCL).
Carnival is the world’s largest cruise business and owns brands including P&O Cruises, Holland America and of course, Carnival. Although demand for cruising is continuing to rise, especially in Asia and North America, things haven’t been plain sailing recently.
One major ship is expected to be out of service for July, resulting in costly refunds. A change to US-Cuba travel policy has also affected planned sailings. And costs are rising faster than the firm is able to lift ticket prices.
However, Carnival’s balance sheet still looks pretty safe to me and although profit forecasts have been cut, the shares have also fallen. CCL stock is now trading on about 10 times forecast earnings, with a 4.6% yield. I reckon the stock could be attractive at this level, and have added it to my own income buy list.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. 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.