There’s something especially sad about the collapse of a long-established business such as Thomas Cook Group. The business had traveled a long way in its 178-year history, but today’s hyper-competitive modern world was too much for it. Some 200,000 stranded holidaymakers aren’t the only ones hurting today. Investors have been wiped out.
Thomas Cook isn’t the only travel business struggling right now – London-listed airline stocks also face plenty of turbulence. British Airways owner International Airlines Consolidated Group (LSE: IAG) has seen its share price plunge 30% in the last year. Budget carrier easyJet (LSE: EZJ) is down 25%, and Ryanair Holdings (LSE: RYA) more than 20%.
Now I’m not suggesting any of them will go bust, but this is clearly an industry facing plenty of headwinds. Thomas Cook was destroyed by a variety of issues, including the weak pound, Brexit uncertainty, and last year’s long hot summer, all of which pose a challenge to airlines as well.
However, the budget carriers in particular are benefiting from one factor that hit Thomas Cook – the rise of DIY holidays and City breaks.
Thomas Cook had problems of its own. In May, it posted a £1.5bn loss, of which £1.1bn was due to its failed 2007 merger with MyTravel, known for brands Airtours and Going Places. Debt remained a fatal problem, with the group owing £1.7bn at the death.
IAG has been hit by weaker demand and rising fuel costs, while BA strike action also flags up a company in trouble. The group, which recently posted a 60% drop in Q1 adjusted operating profit to €135m, now trades at just 4.43 times forward earnings.
As of 30 June, IAG held cash of €8bn, up from €1.76bn on 31 December 31, while net debt to EBITDA decreased 0.3 to 0.9 times. Its earnings are forecast to fall 7% this year, but rise next. With a forecast yield of 6.9%, covered 3.5 times, today’s share price actually looks tempting, despite recent events.
At 31 March, easyJet’s net debt stood at £201m. That’s down from a net cash position of £665m in 2018, although the adoption of IFRS16 accounting standards played a part in that. Debt doesn’t seem a major concern for a business with a market-cap of £4.38bn.
Earnings are expected to fall 9% this year but it’s nowhere near as cheap as IAG, trading at 12.4 times forecast earnings. It’s been hit by overcapacity, like many in the travel industry, but that issue may ease after the collapse of Thomas Cook. The forecast yield is 4%, covered twice.
Ryanair’s Q1 profits dropped 21% to €243m, due to “lower fares, higher fuel and staff costs,” despite 11% traffic growth to 42m. Its net debt was flat at €419m, despite a €700m share buyback, Michael O’Leary’s €99m bonus, and the impact of IFRS16. This shouldn’t trouble a business worth €11.2bn. Earnings are forecast to drop 7% this year, but jump 31% next. However, investors can expect a bumpy ride with Ryanair, without the cushion of a dividend.
If the collapse of Thomas Cook does ease overcapacity concerns, today’s negative sentiment could be a buying opportunity. IAG looks a particular bargain, but the industry could face further struggles if the global economy slows.
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Harvey Jones 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.