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Why I’d shun the Thomas Cook share price, and pile into this dynamic FTSE 100 stock

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The Thomas Cook Group (LSE: TCG) share price is down by more than 80% so far this year. At just over 5p, this well-known travel group has a market capitalisation of £80m.

Is it time for bargain-hunting investors to start buying? I don’t think so. In my opinion, the TCG share price is likely to keep falling. I expect the stock to fall below 1p by the time the group’s restructuring is completed.

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Indeed, if shareholders don’t vote to support the group’s refinancing, then I expect its stock market listing to be cancelled, leaving shareholders with a total loss.

Why so gloomy?

There’s a simple explanation for my gloomy outlook. Debt. According to the firm’s most recent accounts, the group has nearly £2bn of debt. Management also expects§ to need an extra £900m in order to keep operating through the winter low season.

Too much debt and weak trading. I see this as a toxic formula that can only end badly for shareholders. Chinese travel firm Fosun and Thomas Cook’s lenders have agreed to each provide £450m of fresh cash and write off some of the group’s debt in exchange for new shares in the business.

If this recapitalisation plan goes ahead, Fosun and the lenders will own almost 100% of the operations. My sums suggest that existing shareholders will be left with about 1% of the business, assuming they vote to support this plan.

If I owned shares in Thomas Cook, I’d sell today at any price. I believe this is a stock to avoid.

A FTSE 100 stock I’d buy instead

Investing in the FTSE 100 doesn’t mean you have to buy dull dividend stocks with low growth rates. There are some high quality businesses with good growth rates in the big-cap index too.

One of my top choices in this regard is family-controlled clothing and food conglomerate Associated British Foods (LSE: ABF). This unusual business remains under the control of the Weston family. It owns food brands such as Twinings, Ovaltine, Kingsmill and Allinson’s, plus global sugar producer AB Sugar and budget fashion retailer Primark.

It’s unfashionable for a company to own so many unrelated businesses. But in this case it seems to work well. In recent years, growth in one area has offset slower performance elsewhere to deliver consistent returns.

After-tax profits at ABF have risen by an average of about 11% each year since 2013. The dividend has risen by about 40% over the same period.

Primark is expected to remain a top performer this year, with continued growth in the UK, Europe and America, where the chain now has 10 stores. Although adjusted earnings are expected to be flat this year, free cash flow is expected to improve and finance costs should fall.

The ABF share price has fallen by about 30% over the last two years as investors have priced in slower growth.

The shares now trade on 15 times 2019/20 forecast earnings, with a prospective dividend yield of 2.2%. I think this could be a rare opportunity to buy a good-quality business at a reasonable price.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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.

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