Thomas Cook and Greggs

“Markets were in limbo on Tuesday with the FTSE 100 and FTSE 250 indices experiencing minor declines with strength in utility stocks being offset by weakness in banks and oil producers. “Interestingly investors didn’t seem troubled by a new warning from US President Donald Trump who said he is likely to go ahead with a hike on tariffs on Chinese goods. The Shanghai composite index was barely changed and Hong Kong’s Hang Seng index only dipped 0.17%. “The market is perhaps waiting for Mr Trump’s upcoming meeting with Chinese President Xi Jinping to see whether the current talk simply amounts to scare tactics or whether he is serious about targeting additional Chinese goods with tariffs,” says Russ Mould, Investment Director at AJ Bell.

Thomas Cook

“Thomas Cook has experienced a cocktail of problems over the past few months and its shares have been burned as a result. Management are doing their best to apply after-sun lotion to the situation but ultimately the business is looking very sore.

“The big concern is the spike in net debt to £389 million which is 45% higher than the consensus analyst forecast of £267 million. Analysts had forecast for the business to move into a net cash position in 2020 and that now seems unlikely unless there is a radical improvement in trading.

“Suspending the dividend is a sensible move, even if it does deprive shareholders of a stream of cash. Too often companies keep the payment intact, knowing that it helps to keep shareholders happy. In reality, it is better to strip back the rewards and put the health of the business first.

“Six years ago you could buy Thomas Cook shares for 13p, representing the low point for the stock after a dramatic slump from 300p before the global financial crisis. Investors who bought cheaply then were rewarded with a spectacular rally to nearly 190p in 2014. Sadly the direction of travel has subsequently been downwards once again.

“Today it is trading in the region of 34p which values the business at approximately £524 million. To put that into some context, Thomas Cook – once one of the biggest names in the travel industry and an iconic British brand – is now worth less than Card Factory, a retailer which sells gift cards for 99p, and Dairy Crest which makes blocks of cheese.

“Thomas Cook plans to give a marketing push to its higher-margin own-brand hotels and differentiated holidays to help put the business back on track. That won’t be an easy sell given the highly competitive nature of the market and the fact that the general public associates Thomas Cook with cheap holidays. If they are prepared to pay higher prices, the punters may simply go to a brand associated with higher quality offerings.”

Greggs

“It may not be the most glamorous of names but in stock market terms budget baker Greggs has star quality.

“The company has an excellent dividend track record and has not stood still, pivoting from its focus on traditional baking to a broader cheap food-on-the-go option in recent years.

“This seems to be a winner with punters judging by its consistently robust like-for-like sales growth, something which is reflected in today’s decent trading update.

“The company has also been busily reducing its dependence on the high street by opening new outlets in locations which capture work, travel or leisure-related footfall – think stations, airports and the like.

“As Greggs makes a lot of the goods it sells, it is highly operationally geared or, in other words, any increase in sales has an outsized impact on profitability.

“As a result, the accelerating momentum from what was already a strong third quarter is prompting material earnings upgrades today.

“Operational gearing works both ways and a deterioration in trading would have a disproportionate impact on the downside too. Though Greggs is not unaffected by what is happening in the consumer backdrop, its attractive prices should provide some resilience against economic uncertainty.”

These articles are for information purposes only and are not a personal recommendation or advice.