Shares in Thomas Cook are now so cheap that they only need to rise by 12p to double in value. Is this a bargain, or will things get worse?
Is Thomas Cook now a bargain?
Back at the end of 2011 and early 2012, Thomas Cook was in trouble. Shares had collapsed, it was close to bankruptcy. Market cap dropped to a mere £150 million, it was, in part a victim of a perfect storm; such as the Icelandic volcano making air travel across much of Europe impossible, terrorist incidents, there was bad luck. But, the company had been caught napping by the internet and the rise of online travel. During the previous decade, rather than facing up to the online threat, it engaged in a series of ambitious mergers, creating massive levels of debt.
It seemed like there was no hope for the company, yet if you had invested in Thomas Cook at that moment of despair, within a year would have increased your money ten-fold. Investing at a moment of crisis can be highly lucrative.
There is just one snag. If you had bought at the moment of maximum peril and held, right now you would be nursing a loss.
“The only good news I can see regarding the share price,” I said, the last time I wrote about Thomas Cook here back in February, “is that it is still a lot higher than in 2012, when the company nearly went bust.”
Well, that is no longer true.
Debt has surged at the company, Brexit woes have combined with rising fuel costs and the slowing economy in Europe to create an experience of deja vu for investors, staff and other long-term stakeholders in the company.
The company has been given a lifeline, £300 million of funding, but this is dependent on it selling its airline.
The company lost £1.45 billion over the previous six month period, and net debt is now at £1.25 billion.
Can it turn around again?
The trouble is, or so I read, is that the market’s value Thomas Cook’s debt at less than its face value. Some hope that Thomas Cook will be saved by a purchaser, such as Chinese firm Fosun. Then again, if Fosun really wanted to own Thomas Cook it’s cheaper option would be to buy the debt.
The good news
The good news is that the company is now in the midst of the period of the year when it makes its money. It may have a few months to play with.
There is a fatal flaw with Thomas Cook, namely the internet. Online travel is the real reason why the company, along with TUI, is in such trouble. The time to have sold shares in Thomas Cook was 2007 when its share price was at 324p. Then again, TUI shares have suffered terribly too.
Maybe the retail travel agent model is fundamentally flawed. Thomas Cook tried to embrace the internet, by integrating its stores with online, such that the customer journey, from searching online, looking at Trip Advisor reviews, to either booming online or in store, was as seamless as possible.
But you can’t turn lead into gold, maybe the real problem for Thomas Cook is that only alchemy could save it, and that is impossible.
Critics cite its decision to buy out Coop travel agents two years or so ago, but the cost of that deal was small beer compared to overall debts.
Can it recover?
Shares are now so low that it is tempting to say they can only go higher. But that is not true, they can go lower, they can go all the way to zero in a packet labelled ‘receivers office.’
There is a chance that you could make a nice profit by buying, just as happened in 2012. There is possibly a higher chance you will lose your money.
But here is one equation you may like. Suppose you could find ten companies in similar dire straits — I don’t know, maybe Metro Bank would be in that list. You may feel there is a better than 50/50 chance each company will be bust within a couple of years. But you may feel there is a one in five chance they can recover. Following that metric, then ten investments should net you two successes and five losses. The successes could more than compensate you for the losses, providing they rise by around four-fold you would be quids in.
But what are the odds? If Thomas Cook recovered and shares returning to the level six months ago, they would have quadrupled. I would say that such an occurrence is not inconceivable, but neither is it likely.
And how do you find another nine companies similarly placed on a knife-edge. When I look at Metro shares, they are down by 80 per cent over the last year or so, but Thomas Cook shares are at a tenth of the year ago price. The two companies are not quite at the same stage, maybe the knife edge that Thomas Cook sits on is sharper. The strategy I outline here is super risky, even if you can find a sufficient number of companies to implement it.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees