The Motley Fool

Why I’d still shun the Thomas Cook share price at 5p

Image source: Getty Images.

The Thomas Cook  (LSE: TCG) share price took another big dive last Friday. With it down 40% to 8p intraday, my Foolish colleague Roland Head punched out an article, concluding: “For anyone who’s still holding the shares today, my view remains the only sensible thing to do is to sell.”

The shares continued to fall through the day, closing 60% down at 5.38p. Here, I’ll explain why I think the only sensible thing continues to be to sell, even at this further reduced price. Conversely, for investors looking for a solid stock in the travel sector, I’ll discuss why I’d be happy to buy FTSE 100 cruise ship operator Carnival  (LSE: CCL).

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Brace for impact

Here at the Motley Fool, we’ve been warning readers for some time that Thomas Cook’s debt has become a big, big problem. Indeed, that the company’s been firmly on a flightpath to a debt-for-equity swap, and that such a recapitalisation would leave existing shareholders with little or no value.

The reason the share price went into a tailspin on Friday was the announcement of a “proposed recapitalisation” (with a profit warning lobbed in just for good measure). The key elements of the proposal, which are subject to all manner of conditions and uncertainties, are a £750m injection of new money, and a “significant amount” of bank and bond debt converted into equity (gross debt at the half-year-end stood at £1,708m).

The company warned: “Existing shareholders will be significantly diluted as part of the recapitalisation.”

Chief executive Peter Fankhauser made no secret of where the board’s priorities now lie: “While this is not the outcome any of us wanted for our shareholders, this proposal is a pragmatic and responsible solution which provides the means to secure the future of the Thomas Cook business for our customers, our suppliers and our employees.”

Typically, in these situations, existing shareholders end up being offered a choice of accepting peanuts or, if they refuse to back the refinancing, taking a total loss on the company being put into administration. Therefore, I’d value the shares at somewhere between 1p and 0p.

Cruising on

By contrast, Carnival’s business is underpinned by a strong balance sheet, and while it’s faced some headwinds of late, these pale into insignificance compared with Thomas Cook’s. I think the weakness in Carnival’s shares — down from over 5,000p less than a year ago to little more than 3,500p today — offers a great opportunity to buy into the world’s biggest ocean cruise operator.

The industry is an attractive one, with passenger numbers increasing 6.6% a year, and plenty of growth to come. According to industry monitor Cruise Market Watch, there’s considerable untapped potential. For example, it notes: “All the cruise ships in the entire world filled at capacity all year long still only amount to less than half of the total number of visitors to Las Vegas.”

The aforementioned headwinds Carnival has faced in the first half of the current year include voyage disruptions related to Carnival Vista and a US government policy change on travel to Cuba. As a result, management has modestly downgraded earnings guidance. However, I view the rating of the stock at 10.3 times earnings as undemanding, and a prospective dividend yield of 4.3% as attractive.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

G A Chester 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.