Investment Column: Thomas Cook is just the ticket for investors
Trinity Mirror; Keller Group
Friday 14 May 2010
Our view: Buy
Share price: 236.1p (+4p)
The travel sector hasn't had an easy time of it recently. Although people refused to sacrifice their holidays during the recession, they did spend less. Then there were various unexpected "events" such as the Icelandic volcano (which cost Thomas Cook £70m) and the weak pound putting package tour customers off their traditional favourites such as Spain.
But that would be missing the considerable upside Thomas Cook offers. For a start, it did itself no small measure of good during the airport shutdown caused by the volcanic ash cloud. It managed to get most customers home and, while not everyone was happy, it attracted more than a few positive comments on news programmes in the days after flights were grounded.
This came at a time when the package holiday was already showing its merits as a number of independent operators failed, leaving customers stranded. If Thomas's goose gets Cooked, there's always its bond with the Travel Association (ABTA) to fall back on.
This should drive the company's momentum and, lo and behold, the chief executive Manny Fontenla-Novoa said yesterday that Thomas Cook's bookings had bounced back since the disruption, with UK sales up 5 per cent over the past four weeks and bookings by German and Austrian customers up 10 per cent over the same period.
Then there is the impact of the economy on British bookings. The recovery, while hardly roaring, is proving steadier than the sceptics had feared. Oddly, one of the chief threats to it is something that might benefit Thomas Cook: a weak euro. Recent events have made Spanish holidays start to look attractive again – and boy do they need the business on the Club Med.
Thomas Cook's first-half operating loss of £130m was not as bad as the City had feared. Its 5 per cent fall in revenue should be put in context: it was about taking out excess capacity so margins should be maintained. We said buy at 212p back in December and, with the shares on an undemanding eight times full-year earnings, we say keep buying.
Our view: Buy
Share price: 121.5p (-17.3p)
Shares in the media group Trinity Mirror fell by more than 12 per cent after its interim management statement. Some analysts justified the slump by pointing to weakness in March and April's advertising revenue. That would be reasonable were it not for the fact Johnston Press flagged up similar trends and did not endure such a kicking.
We wouldn't go so far as to say Trinity's update was positive, but we think it offered grounds for hope and believe the shares slump was overdone. Investors must, of course, be mindful of volatility in trading, weakness in advertising and structural pressures faced by the group, particularly its regional newspapers. But even there, it is not all bad news. Its GMG Regional Media business, publisher of the Manchester Evening News and associated weeklies, is performing ahead of expectations after it was bought by Trinity in March.
This, coupled with a moderation in the pace of advertising decline as the economy picks up, should lead to revisions of what the City expects. That in turn will boost the shares, which currently trade on modest multiples. On Altium's numbers, Trinity is currently on just 6.4 times earnings for the full year, which is too cheap.
Like its peers, it has had a tough few years and the shares reflect that. What they are missing is the potential for improvement as the year progresses. With that in mind, buy.
Our view: Sell
Share price: 632p (-150.5p)
Bad news from the ground engineering specialist Keller Group. It warned yesterday that profits for 2010 would come in "significantly below" expectations when it reports in August.
General economic improvements are yet to turn into any "meaningful upturn" in Keller's construction markets. And although it may finally be returning to revenue growth (after being hammered by the recession in the construction industry), it will be "some time" before the improvements are reflected in operating margins.
Keller's US market is particularly tricky. Economic weakness, intense competition and bad weather have left it facing a break-even situation at best in the first half and will drag it down over the full year. Keller's European markets also remain sluggish.
It is no lame duck, with several attractive markets including Poland, Australia and Singapore. But, after a strong-ish run in the share price (it has risen about 25p since February), the stock has plunged and, what is more, faces ongoing downward pressure in the short to medium term. Now is the time to take profits and look elsewhere.
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