Updated: Should I buy shares in Thomas Cook?

Thomas Cook Group reassured markets on Wednesday with the news that trading across the group has stabilised and it was optimistic about summer bookings. But were investors convinced?

Despite subdued winter sales, which saw a 4% dent in bookings year-on-year, the struggling tour operator said it had seen improved figures in recent weeks and the summer season had promise.

"Trading across the group has been stable since we last reported and in line with expectations," said chief executive Sam Weihagen.

"In the last few weeks we have seen an improvement in UK booking trends, helped by our recently-launched advertising campaign and upgrades to our website," he added.

The company claimed its website improvements had pushed up online bookings by 19%.

Investors will no doubt hope this is factored in when the company reviews its position on high street stores.

Chris Beauchamp, sales trader at IG Index, told Interactive Investor at the start of the year that Thomas Cook's determination to hold onto its high street presence could cost the company dear.

"In the long run, only drastic change, or a takeover to save this iconic brand, are the best hopes for Thomas Cook," he said.

In the absence of both of these, the company still managed to eke out some improvements.

Winter bookings

Cumulative winter bookings in Central Europe are were 3% lower year-on-year, although the average selling price rose 3%.

Since the company's last update, its bookings in West & East Europe have stabilised and reflect reduced bookings to the Middle East, North Africa region, particularly in France.

Bookings in Northern Europe increased 10% in line with capacity increases with stable prices but tighter margins, dented by fuel costs and lower selling rates.

Germany was the star of the show, with a 20% boost to bookings from the same time last year, helped by an 18% increase in planned capacity and despite a 5% slip in year-on-year average selling prices.

Summer bookings

Looking ahead, UK bookings are 2% behind the previous year and a 10% drop in Mainstream bookings reflects the 12% reduction in capacity as the company has 17% fewer holiday to sell in 2012. But the average selling price remains steady, with a 4% increase year-on-year.

Central Europe bookings are in line with planned capacity, with the last four weeks' trading 10% ahead of prior year. Pricing has improved despite the competition in the market and margins are stable.

Trading across all markets in West & East Europe remains challenging as demand slackens, particularly in France. However, bookings in recent weeks have been more promising..

Bookings are up 2% in Airlines Germany with capacity increasing 7%, predominantly on long-haul destinations. Yields are up 5%, partly driven by a higher share of intercontinental routes and the introduction of a fuel surcharge.

Back from the brink

“News that the company appears to have stabilised financially will reduce some of the fear factor from trading the stock," said Mike McCudden, Interactive Investor's head of derivatives.

"With the sun shining and investors getting into holiday mode the renewed optimism in TCG should lend weight to buying on the dips," he said.

IG's Chris Beauchamp told Interactive Investor: "Thomas Cook seems to have pulled itself back from the brink, at least for now, but it remains a long way away from a full recovery.

Beauchamp notes that the shift to specialised holidays, with their greater margins, away from package holidays, is an interesting development, although the market for such tours is naturally smaller.

"One summer of good trading will not save the company, and it will be a long slog to rebuild fully the confidence lost last year."

Outlook

Thomas Cook does not expect a turbulence-free ride.

"As we stated in our first-quarter results, we continue to expect 2011/12 to be a challenging year given the economic backdrop and difficult trading environment, particularly for winter. The trends which we saw in the first quarter have continued through the second quarter, but summer trading is more encouraging," the group said.

Another highlight in the pipeline is the sale of the group's Indian business. There was confirmation that this had been the subject of a good level of interest since the sale was announced in February and Thomas Cook said the disposal process is progressing well.

Investor reaction

Much of the debate on the Interactive Investor discussion board for Thomas Cook focused on the firm's failure to meet its March deadline to find a permanent chief executive.

"We've a decent (acting) CEO in Sam who on the face of it is doing a pretty good job… 'we want a great CEO' and that can take time," said user 'plmokn098'.

Commenting on the trading update, he added: “On the face of it a solid performance in difficult trading conditions – overall up on last year, which considering the November issue is pretty good."

User 'Dodgymix' was less impressed: “So not the great news we were hoping for but should give some confidence. Demand subdued in most areas although capacity has been cut so places left to sell much reduced. A good way to avoid cheap within the week deals. Only business really performing is German one and that's being impacted by strong competition."

Analyst view

'Buy' - In a surprise move, Investec upgraded the stock from 'hold' to 'buy' on Wedneday.

'Hold' - Numis, Oriel Securities and Shore Capital all reiterated their 'hold' positions.

'Neutral' - Staying on the fence were analysts at West LB.

'Sell' - Simon French and Lindsey Kerrigan at Panmure Gordon reiterated their 'sell' stance and 10p target price saying bookings remain slower than expected in Northern Europe and West & East Europe and they think consensus expectations will fall to c£200 million EBIT.

"The group's balance sheet remains stretched and this level of profitability implies pressure on the group's leverage covenant when it is tested in December. More disposals will therefore be needed and we question whether there is a viable sustainable ongoing business. The group has been unable to meet its end of March target for a new chief executive and the stock trades on a full year 2012E P E of 4.2 times," they noted.

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2012 backdrop

2012 has not been a good year for Thomas Cook.

In tricky times, holidays are a luxury that many have to do without.

This was reflected in the company's struggle and its stock's 92% plunge during the 52 weeks to 23 January.

Mike McCudden, head of retail derivatives at Interactive Investor pointed out that the company's booking slump in January was not unusual.

"Using the first few weeks in January, while most of us don't have two cents to rub together, to determine the fate of Britain's oldest travel agent is questionable," he said.

McCudden reckons the company's reputation has taken a knock during a tough economic climate, but believes that the draw of a holiday will no doubt work out much cheaper than a 'staycation' and so the company may yet prove the doomsayers wrong.

"It will be a long haul for Thomas Cook, but it does appear to be getting its act together as it cuts costs and sells off non-core assets. Signs of recovery in some of its more popular destinations will help," he added.

Online versus high street

In November the group moved away from the edge of a financial abyss with positive news of a fresh £200 million banking facility.

However, by December, when the delayed full-year results were released, the travel company cited "declining real incomes" and "employment uncertainty" as reasons for the UK weakness.

In the same month, a Which? survey rated Thomas Cook Airlines the nation's worst short-haul carrier.

In January, retail guru Mary Portas mystery-shopped a Thomas Cook branch and gave it seven out of 10, with a high score for "service and confident salesmanship" in her Daily Telegraph column.

That would be great news for Thomas Cook if all its customers booked through high street branches. But increasing numbers are booking online and Thomas Cook's share of this market is thought to have shrunk by as much as 45% in the last year.

However, January also saw Ian Ailles, Thomas Cook's mainstream managing director, giving an upbeat Travel Weekly: "We are confident we have the right products and prices in the market. We are focused on the right value, the right type of holiday and the right price, therefore trying to match the volume from last year is perhaps not the right thing to do.

Analyst views - January 2012

'Add' - Alphavalue, which upgraded the stock from 'sell' to 'add' and raised its target price from 6.8p to 17.6p.

'Buy' - Douglas McNeill at Charles Stanley kept his 'buy' recommendation with a target price of 20p.

'Sell' - An early December note from Simon French and Lindsey Kerrigan at Panmure Gordon reiterated the broker's 'sell' stance and target price of 10p. They said "structural and consumer issues" were at the heart of their position.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.