‘On the Beach’, TUI and Thomas Cook – is it time for investors to follow sun seekers?
Shares are up at TUI and Thomas Cook over the last month. At ‘On the Beach’ they took a wobble. But the 12-month trend is impressive. Should you dive in?
The UK economy is not such a happy place these days, despite that, companies in the travel business seem content enough.
The UK economy is bottom of the growth league in the G7 this year and is expected to be bottom next year and the year after. See our previous article 'economy limps to a new crisis'.
The good news, from the perspective of the UK economy, is that wages are at last growing faster than the inflation rate. The bad news, the pound has tumbled on the worsening prospects of the economy. And that is not so good for British holiday makers.
But, Thomas Cook, TUI and ‘On the Beach’ don’t seem bothered.
Over the last 12-months, shares in Thomas Cook are up around 50 per cent. At TUI, they are up by a similar amount, and at ‘On the Beach’, they had risen by even more than that, but have taken a pounding in recent days.
Over the last five years, shares in Thomas Cook are down - by a little more than a fifth. Shares in TUI are up around 70 per cent, while ‘On the Beach’ shares have seen a two-and-a-half-fold rise since their IPO in the autumn of 2015.
The last few days have been kind to the two older firms. Thomas Cook’s investors celebrated on news that it had created a 150-million-euro fund to finance hotel expansions. Shareholders were especially buoyed by comments from Credit Suisse that it expected shares to do well “given the significance of these internally driven deals and external events”. The company is also benefiting from the vacuum in the market created by Air Berlin’s bankruptcy.
TUI is impressing too. In the six months to the end of March, earnings before interest, tax, depreciation and amortisation (EBITDA) increased 26 per cent, rising to 158.6 million euros and sales jumped 7.2 per cent to 6,813.5 million euros.
‘On the Beach’, however, was hit by the collapse of Monarch airlines forcing seat prices up.
TUI and Thomas Cook are traditional travel companies, with a string of valuable assets such as hotels and aircraft. They may be adversely affected by the weakness of the UK economy, but these are global players – TUI more so than Thomas Cook, and the strength of the US and euro economies are helping.
‘On the Beach’ is, of course, a quite different business. It’s an online booking/travel site that enables customers to build their own holidays. It’s rather good at it, too. The boss, Simon Cooper, set up the business from his bedroom in Macclesfield in 2004.
Its overheads are low. It can ramp up or down with market conditions with ease - for ‘On the Beach’, no need to worry about the cost of all those empty aircraft or hotels when business is down.
In other words, ‘On the Beach’ is a disruptive business. It’s a tech which focuses on the holiday trade. And the valuation - 30 times expected earnings - reflects this.
It has been around long enough now that it is less reliant on online advertising, instead customers tend to come direct to its site. This reduces its cost per sale.
I wonder whether it may have a slight vulnerability related to GDPR - it is, after-all, a good example of a company that processes a lot of customer data.
But then, for that matter, so do TUI and Thomas Cook.
It only has about a fifth share of the market it operates in, so there’s lots of potential for growth.
My biggest concern with ‘On the Beach’ is an obvious one: its whopping PE and need for continued rapid growth to justify it.
But I have a wider concern, which is more specific to TUI and Thomas Cook and companies like them. The economic cycle looks to be around peak. The best time to buy shares in companies like this duo is during the build-up to peak.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.