By Mark Allen
The lingering ash cloud has continued to cause disruption at many airports throughout Europe and travel related stocks have been heavily affected. Thomas Cook Group (OTC:TCKGF)(LON:TCG) is one of the world’s leading travel groups, with total sales of £9.3 billion and was formed from the merger of Thomas Cook AG and MyTravel Group in 2007.
As can be seen from the above chart of Thomas Cook, the shares have fallen over 25% since the arrival of the ash cloud in April and are nearing historic support at 192p. The oscillators are deep within oversold territory, whilst the RSI is showing divergence, implying that the selling momentum could be almost exhausted.
The group released an interim management statement on the 13th May, showing that its first half pre-tax loss narrowed and that it would take a £70 million hit from the closure of European airspace due to the volcanic ash cloud.
Violent protests in Greece’s capital Athens have also deterred UK and German holidaymakers from travelling there, with bookings from Germany and the UK falling 30% and 24% respectively.
However, the demand for holidays has proved to be surprisingly resilient during the economic downturn and the group announced that it has seen improvements in almost all of its markets recently.
Excluding the impact of the volcanic ash cloud, the group remains confident of meeting its expectations for the year. Furthermore, following the recent relaxation in the rules governing the closure of UK airspace due to volcanic ash, this could indicate less chance of disruption going forwards.
At current prices the company is trading on 7.5x earnings for this year and yielding an attractive 5.5%. In April and May it successfully refinanced the group’s debt, which should put the group in a good position to continue growing the business through strategic acquisitions. Thomas Cook is currently in advanced talks about joint ventures in China and Russia and has long been discussing a potential acquisition in Russia.
There are clearly many headwinds being faced by the industry. However, I believe these are more than priced in and with trends steadily improving in the sector I feel that Thomas Cook looks fundamentally cheap at current levels. Two directors have also bought shares in the company this week, with the Chairman doubling his holding at 216p.
At the time of writing the share price is 200.6p and with a tight stop loss marginally below historical support at 188.5p, I believe a long trade offers an attractive risk/reward basis, with near term targets seen at 210.5p, 216.8p and 226p.
Disclosure: No position