It was pleasing to see the Thomas Cook Group (LSE: TCG) share price climb 10% on Thursday morning. To put that into perspective though, it’s really only a small blip of contrarianism in what has been a steady downwards slide. The shares have lost 85% of their valuation over the past 12 months.
I’ve suggested before that I think Thomas Cook’s valuation is close to factoring in the risk of the worst possible outcome, and that’s for the company to go bust. But the more I look at the company, and the urgency with which it’s tackling its crisis, the more I’m becoming convinced it’s going to survive.
So could we have a turnaround target here? My colleague G A Chester has recently examined that possibility, and he pointed to what does indeed seem like an ominous move. Thomas Cook’s survival depends, to a great extent, on tackling its huge debt mountain — and we’re talking about £1.2bn here, which isn’t small change.
To do that, the company seems to have switched focus to satisfying its lenders, without the support of whom it could disappear overnight, and away from its stated earlier focus on shareholders. Unfortunately for shareholders, I think that switch in focus is necessary.
Also, dumping assets is good. But it’s a bit of a fire sale right now at a low point in the travel business cycle. I think the company is doing all the right things to ensure survival, but I can’t see there being much at all left for shareholders. Thomas Cook is still one to avoid at all costs, in my view.
Best in class?
Of the UK listed airlines, I rate easyJet (LSE: EZJ) as possibly the best. But a look at its share price chart in recent years lends support, I think, to my avoidance strategy.
The easyJet dividend is one of the airline’s key strengths as an investment, in my view, and it’s been reasonably consistent in cash terms over the past five years. But a gyrating share price has seen the yield lurching from low of around 3% to more than 5%, with forecasts suggesting about 4.4% for the current year.
Now, that’s a solid rate of income, and one that would usually qualify a stock to at least make my watchlist. But the share price has been alternating between soaring and slumping over the same period. A 39% drop in 12 months is the latest in a five-year fall of 29%, resulting in an overall loss even despite those attractive dividends.
Focusing on the short-haul European market has made easyJet more susceptible to short-term downturns, and Brexit fears will have led to some of the sell-off.
But the bottom line is that airlines do well when oil prices are low, and not so well when they’re high. They compete only on price, and fuel costs are a big part of that — and utterly out of an airline’s control.
I see easyJet as a well-managed company in a nasty business, and it’s definitely not for me.
Alan Oscroft 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.