A year after being rescued by its banks, Thomas Cook now appears a ‘Christmas cracker’ of an investment according to former analyst turned investment banker Andrew Monk
I last wrote about Thomas Cook a year ago when, for the first time in a long while, I started to see a few positive signs.
At the time, Thomas Cook was teetering on the edge, effectively in the hands of the banks and seeking a new group chief executive. My advice was “to find someone who is not steeped in the travel industry, who can think afresh, is prepared to take pain before the gain and has a long-term vision.”
This is the direction the company has taken by recruiting Harriet Green, even if it wasn’t acting upon my advice, and I like the fact that she appears prepared to take the pain before the gain.
Analysts in the City are still concerned. They cite the company’s “mountain of debt” and the weak economy as reasons to be “uncheerful”.
Yet the reality is the patient has progressed from intensive care to recovery. The group is out of hospital and back in the gym training to be fit again – and history tells us that once you have recovered that much, normally a full recovery is achieved.
If Cook achieves a full recovery, even if it takes time, considerable value will be created. I would expect to see the share price go significantly higher. Clearly, Thomas Cook’s directors do too as they have all been buying stock.
The two important things to look for when you leave hospital and go back to the gym are 1) your weight and 2) your pulse. In Thomas Cook’s case this means watching the level of debt and the underlying cash flow.
The good news is that when Green reported Cook’s results last week (November 28) both of these looked better than expected. The debt is still high, but was lower than expected and coming down – i.e. they have the weight under control.
Cash flow was also strong, so the pulse is good. Ultimately, if you have good cash flow you have a good company.
The other point to remember for anyone thinking of investing in Thomas Cook is that, because of the debt, the company is a leveraged play. That means when it’s bad, it’s very bad. But when it’s good, it’s very good – and that is where I think we are today.
Thomas Cook is getting better and so will be very good. As an investment, it can outshine Tui Travel which does not have the same leverage.
The company still has work to do. Harriet Green is going to have to make some big macro decisions.
But this looks like a tasty morsel to me and, because of its small size on the stock market, it is under-owned by institutions. So for a change, the small investor – the man on the street – can eat first. I would describe it as a Christmas cracker.
Andrew Monk is chief executive of VSA Capital