Stock of the day: Thomas Cook’s year ends badly

Thomas Cook profits beat expectations but its shares fell hard due to margin pain in Spain

Spanish flights

The problem stems from Europe’s key holiday region of Spain, a major focus for Thomas Cook which recently set up a new Majorca-based airline. The company also plans to base other airlines there under the same Spanish operating license. The aim is to save costs as the business of creating holidays in the region becomes increasingly competitive.

Margin pressure

The severity of the Wednesday’s sell-off—shares fell as much as 14.5%—could reflect anger. The company would or should have been aware of the pressure at margin pressures at the time of its pre-close trading statement late in September. In that update, TCG noted “intensified competition to Spain, leading us to limit volume growth in order to help mitigate the significant margin pressures”. That was probably read as meaning margin impact, if any, would be contained. In the event, Wednesday’s finals posted a 130 basis points gross margin fall compared to the rise of 88bp the market was expecting.

Overreaction?

Perhaps the market reaction is an overreaction given that the company reported that profits and revenues rose higher than consensus. But the sell-off also speaks to jitters re-entering the sector at least partly linked to airline seat prices, as well as price competition in general. The year has seen the collapse of several high-profile European short-haul airlines. In Thomas Cook’s case, the worry isn’t insolvency. Rather, there’s concern that the group could be drawn into ‘investing’ ever more deeply in price at the expense of a margins. Thomas Cook Airlines have a combined 94 aircraft, flying 16.7 million passengers a year to holiday destinations.  It is up against a rejuvenated easyJet in Spain and particularly Germany, after Europe’s second-largest carrier this week rounded off a year in which it saw off rivals, including the purchase of assets formerly owned by Air Berlin which went bust.

Lost trust

To be sure, Wednesday’s sell-off appears to overlook potential post-Brexit advantages from the group’s new Spanish license. The likely return to profit by TCG’s German carrier, Condor implies some much needed leeway in that market too. Furthermore, the group backed current 2018 expectations saying that signs of higher demand for destinations in Egypt and Turkey would offset continuing margin pressure in Spain. But the stock price remained sharply lower in afternoon trading. This shows that Thomas Cook has some way to go to rebuild investor confidence and even trust.

‘Well positioned’ for ‘challenges’

With Thomas Cook shares still up 70% on the year by Tuesday’s close on an impressive turnaround at the half-year stage, TCG certainly had its work cut out on Wednesday to offer investors further reason to hold or buy. CEO Peter Fankhauser said the company was “well-positioned to achieve a full year operating result in line with market expectations.” But he also described UK conditions as “challenging”. Together with the margin slide, the temptation to sell was too much for many shareholders. If indeed there is an element of overreaction, the stock could recoup a little over the near term. But the blow to sentiment on Wednesday will likely require longer fix.

  • Key characteristics of Thomas Cook stock’s technical chart from our point of view: firstly the stock has been stymied again by the long-term declining trend line that extends all the way back to the first day of trading of the company in its present form in June 2007
  • Wednesday’s downwards spike has also sliced through validated support at 111p and resolved a very long standing triangulation to the downside as well. Whilst TCG traded back above the key support mentioned earlier at the time of writing, the breach looks ominous
  • Note the bearishly diverging RSI momentum gauge—classically such aspects indicate that a downturn is due in underlying price
  • Below 111p, the most solid next support looks to be 88p, and that’s where the stock is likely to head now

Thomas Cook Plc. share price chart (daily intervals) 

Source: Thomson Reuters and City Index

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