Investment View: It's worth taking the trip with two travel firms
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Friday 23 August 2013
It's holiday time so it seems appropriate to run the slide rule over the two big tour operators that have recently issued rather positive trading updates. While we relax, they are now starting to focus on the winter season and even next year's bookings. But the numbers to date look good.
First to Tui Travel. Its recent statement hailed strong trading in the UK and Nordics, although France is weak and Germany isn't exactly humming. A target of raising underlying profit (stripping out account quirks and one-offs) of 10 per cent looks as though it will be achieved, all the same.
On the downside, analysts were a little disappointed that profit guidance for the year wasn't raised, possibly reflecting weakness. We'll see. That could, in reality, just be a quibble.
Certainly, the company's UK operations won't be hurt by the Bank of England's recent pledge to keep interest rates down. Policymakers want consumers spending. Foreign trips may be one way of doing that, with tour operators perhaps benefiting from a desire among stressed, time-poor people to have everything sorted out for them.That won't do much for the British economy, but Tui Travel, which owns Thomson among others, will be laughing.
The trouble is that the market has very much caught up with the story. The shares have doubled over the past year and, if you got in early, you'll have done very nicely. There is an argument for profit-taking here, but while I don't see the shares exciting anyone from this point, they should still travel relatively smoothly.
They trade on 13.2 times earnings for the year to 30 September, falling to 12 times next year, yielding a prospective 3.3 per cent, rising to 3.6 per cent, which is respectable enough.
At that sort of level, I'm just about willing to hold. However, they don't offer the same sort of value you'll get from Thomas Cook (and I'm not talking about the product).
As I've written before, the latter has been our star from this year's 10 shares to follow. We said buy at the start of the year with the shares at 48p. They have more than trebled in value since then. But there is still fuel in the tank, and there are reasons for believing they can go further.
For a start, the recent trading statement was very well received. First to the big bugbear – the group's overwhelming debt burden. That was more than halved. Having looked in very real danger of going under before Harriet Green was drafted in, Cook's now seems to be a steady ship.
So many companies which flirt with the abyss end up falling in, particularly when they are reliant on consumer confidence. That Thomas Cook did not is quite an achievement, albeit not one without pain. We should remember that a lot of jobs have been lost to set things straight again.
All the same, Ms Green's decision to focus on the internet is yielding results. It is to be hoped that she will continue to pay debt down and not listen if siren voices start urging her to make the business sweat.The spectre of a big holiday firm going under doesn't bear thinking about. A conservative balance sheet is in shareholders' best interests as well as consumers'.
So it may be a while before there is a dividend. The last one came in 2011. Shareholders may have to wait until 2015 for the next one. But the fact that analysts are now speculating on when the payment might be tells you the company is in increasingly good health. The numbers looked good. The company is turning a profit again, and with 85 per cent of its capacity sold it doesn't need to resort to "crazy" discounting .
But there should be more to come, so there is still a good reason to buy, particularly as the shares have eased off year highs. Profits should double over the next year and, for the year to 30 September 2014, they trade on an undemanding 14.7 times earnings. This company is only at the beginning of the turnaround project and I still think there is money to made. Buy.
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