Thomas Cook shares set to remain haunted by former CEO

On the face of it, there was little in Thomas Cook’s first big update of the year, out this morning, to warrant the slide of more than 5% in the stock seen today.

After all, the market was already well aware Thomas Cook was unlikely to make any great progress in its first quarter: it warned in September that trading was tough and that further growth would come at a “more moderate pace” than seen during the past few years.

Thomas Cook’s ‘moderate pace’

• TCG underlying operating loss narrowed by £7m to £53m
• Group like-for-like revenue increased 1.6% to £1.5bn
• Winter 2014/15 offering is 85% sold, in line with last year; Summer 2015 41% sold, 3% higher than this time last year
• Net debt dropped £24m to £1.3bn
• UK business “now achieving its highest underlying earnings before interest and taxes margin since 2009” –CEO Peter Fankhauser

Europe drags heavier than on rival TUI

In the event though, whilst the second-largest travel company in Europe said UK business had been “robust” during its first quarter, it sounded a clear warning that the market should not expect it to beat strong comparative performances achieved in Continental and Northern Europe last year.

Even if “significant improvement” was seen in Continental and Northern Europe in recent weeks, the continuing drag from these parts is one of the main points of concern for TCG shareholders.

With a hefty 59% of revenues in 2014 from Northern/Central Europe on a gross margin of just under 23% compared to the industry gross margin of 58%, investor concerns are rational.

No harm in noting that whilst direct competitor, TUI Group’s margins are far shakier—its 90%-exposure to Greater Europe means it is a formidable competitor by virtue of sheer scale alone (think pricing).

Plus TUI’s delta from even just a moderate uptick in trading conditions in the region will be more significant than TCG’s.

De-rating may have to go further

The market seems well aware of Thomas Cook’s chances already.

For one thing, despite trailing price/earnings growth of more than 15 times, the forward consensus barely scrapes 9.5 times, according to Thomson Reuters data.

At the same time the shares have de-rated a net 30% since 12th February 2014 to date.

Further forecasts currently see net profit for TCG’s financial year ending in September at £181m.

That’s after TCG reported a loss of £118m in its last full year.

This presupposes net income will triple in the space of a year.

Common sense alone suggests the balance of probabilities on that is not favourable.

Ex-CEO’s comments haunt the outlook

We can combine this state of play with ‘real’ assessments of TCG’s turnaround outlook that filtered out from key company players in the wake of its calamitous CEO succession bungle, late last year.

Whilst former CEO Harriet Green said at the time of her abrupt departure in November it was always her intention to move on once her “work was complete”, she was later quoted in interviews as saying the turnaround at Thomas Cook had further to go.

Obviously, the content and the context of such comments may speak volumes.

Perhaps we should add a small ‘discount’ due to the nature of the source, but my view is that there is still far less visibility on the outlook than the average investor should be comfortable with.

Chart crunch

In the light of the above, it shouldn’t be a surprise that there’s lots of food for thought in TCG’s daily chart at the moment.

We can start with the price’s drop below its 200-day moving average, today, right into a confluence of 100, 50-day MA and a 38.2% retracement of its ascent from crisis lows of 2012.

Failure to hold above these levels would risk a test of the space between the next proven potential cradles around 112p.