By Robert Sutherland Smith
Bottom picking – a habit your mother should have instructed out of you many moons ago – takes as they say, a long time. And so it has proved with Thomas Cook, once Britannia’s first mass, guided tour operator and now Europe’s second largest Anglo German holiday company. It confounds the old saying that a company needs to be in the top three to prosper. In the case of Thomas Cook even being in the top two does not deliver prosperity of growing shareholder value, profits or dividends of which, there are sadly none. The dividend was slashed like an over-pruned autumn rose bush, in 2010, and then pulled out altogether the following year; the company has paid no dividend since 2011.
Nor does it have the support of much in the way of net equity; otherwise known as attributable assets. Balance sheet assets attributable to ordinary shares were, on the basis of last September’s balance sheet, worth about 16p a share; because of a great hunk of goodwill there were no net tangible assets to support the share price of 142p (last seen); finally it is massively geared with debt; a share without asset backing, annual earnings or dividend payments, and brandishing an unsuccessful record of late. In short an indisputable speculation rather than an investment.
However, I note that the share price has been buoyant in recent weeks so I have had a look at it, again. Basically, the shares have rallied in the last few weeks from 120p – a rise prompted by recent results. However the shares have still underperformed over the last year – down 17% in absolute share price terms and 24% relative to the FTSE 100 Index. Over five years, the share price has fallen by 33% in absolute share price terms and 55% relative to the Index. There is precious little in the way of profits to be taken and the share price is discounting a lot of past bad news.
Like a drug discovery company or oil explorer, this share price too will respond to news flow. The logic would seem to be that the share price will respond to better prospects. There does seem a pattern of gradual improvement in performance as the management strive towards a positive bottom line. The results for last year to 31st December 2014 saw the company break into marginal profitability for the first time at the trading profit (EBIT) and operating level largely as a result of a 42% fall in operating costs. Moreover, annual sales rose 1.6% on a like-for-like basis, even while the gross profit margin dropped from 22.15% to 21.6%, showing the price competition within the holiday market.
The more recent Q1 figures were about as tentative as the greenery carried in the beak of that bird that landed on the Ark. Like-for-like revenue increased by 1.6%; a small positive trading profit (EBIT) replaced an even smaller loss the year before. The cash flow conversion jumped from 25% year-on-year.
This seems to be a story of a company heading for profitability, mainly through cost cutting and greater efficiency. The market consensus expects a 7% increase in earnings this year to estimated earnings per share of 12p and a forecast PER of 12. The next year, beginning next October, is the year of optimism for these estimators and forecasters who see a 27% consensus jump in earnings to 15p and a PER of under 10 with a dividend payment currently worth 2%. On a year’s view a speculative recovery situation showing small incremental recovery momentum.