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Thomas Cook is gone and this growth stock looks set to benefit

Image source: Getty Images.

It’s understandable if many are wary of investing in the travel industry right now. The demise of package holiday operator Thomas Cook last month has shown even the most established names in the business won’t survive if they’re poorly run for too long. Factor in the ongoing uncertainty surrounding Brexit and the current aversion can be easily justified.

Notwithstanding this, it does seem logical to suppose rivals to the 178-year-old firm will be benefit from reduced competition. One is On the Beach (LSE: OTB)

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According to today’s (brief) update, trading over the year to the end of September has “remained in line with management’s revised expectations for the full year.” While encouraging, it’s arguably more important the company went on to state the aforementioned liquidation of its rival had “created an unprecedented opportunity to take additional market share at an increased rate” and it would be increasing its marketing spend as a consequence. 

Despite this positive tone, On the Beach’s shares were trading flat this morning. That’s not altogether surprising considering its higher valuation relative to peers (17 times FY20 earnings). However, I think this premium makes sense. 

In sharp contrast to Thomas Cook, it isn’t burdened by huge fixed costs and a massive debt pile. Its online-only model also gives it the flexibility to respond to changes in the market far quicker than rivals. Returns on capital have been around 20% since 2016 and the £573m-cap’s acqusitions of and Classic Collection have helped cement its status as one of the UK’s largest beach holiday retailers (20% market share).

Right now, I would think this company is the best of a less-than-appetising bunch. And should Boris Johnson’s deal get sufficient backing from MPs, the shares could rally.  

A tasty alternative

Of course, getting exposure to the travel industry doesn’t necessarily entail buying a holiday operator, or even an airline. Another company I continue to like is global food and drink concessions firm SSP Group (LSE: SSPG)

Full-year figures from the FTSE 250 member are expected on 20 November. Based on last month’s update, however, I don’t think there’ll be any nasty shocks for those already holding. 

SSP reported positive trading in Q4 with total group revenue over the period roughly 10% higher year-on-year. While operations in North America have been held back by the grounding of Boeing Max 737 aircraft following two fatal crashes, SSP has achieved significant net contract gains in this part of the world, as well as in Continental Europe. Sales at airports in the UK have also been “fairly resilient.

In addition to leaving full-year guidance unchanged, the company said its diversified business model should leave it “well placed to benefit from the significant structural growth opportunities” in its markets. Nevertheless, it did caution airline capacity cuts, coupled with ongoing economic uncertainties, could still impact on trading in 2020. 

At 21 times earnings for the new financial year, SSP’s stock is more expensive than that of On the Beach. A 1.7% yield, while easily covered by expected profits, is unlikely to be of interest to anyone investing for income either. 

As such, I’m not quite ready to buy in just yet. It remains on my watchlist as a potential purchase in the event of a prolonged downturn in the general market.  

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of SSP Group. The Motley Fool UK has recommended On The Beach. 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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