Thomas Cook poised to travel?

A glance at the chart below of the FTSE 100 shows that it has been another volatile week, as intensifying debt concerns in the eurozone has led to heightened fear in equity markets.

Following the announcement of the European Union and International Monetary Fund’s (IMF) stabilisation fund last week, the European Central Bank (ECB) has purchased an additional €16.5 billion in peripheral eurozone government bonds in order to provide sufficient liquidity to the debt-laden economies.

Germany also announced that it would prohibit naked short selling of Euro area government debt, related credit default swaps and the shares of leading financials in a bid to ensure that its remedial policies had the maximum impact of improving stability and reducing nervousness in the region.

However, the moves did not have the desired effect, as investors feared that the latest actions were not thought out and could be hiding something more significant. As a result, the Euro fell to its lowest level against the dollar for four years and the impact of a potential slowdown in eurozone growth weighed heavily on many global asset classes.

A glance at the above chart of the FTSE 100 shows that it has been another volatile week, as intensifying debt concerns in the eurozone has led to heightened fear in equity markets.

Following the announcement of the European Union and International Monetary Fund’s (IMF) stabilisation fund last week, the European Central Bank (ECB) has purchased an additional €16.5 billion in peripheral eurozone government bonds in order to provide sufficient liquidity to the debt-laden economies.

Germany also announced that it would prohibit naked short selling of Euro area government debt, related credit default swaps and the shares of leading financials in a bid to ensure that its remedial policies had the maximum impact of improving stability and reducing nervousness in the region.

However, the moves did not have the desired effect, as investors feared that the latest actions were not thought out and could be hiding something more significant. As a result, the Euro fell to its lowest level against the dollar for four years and the impact of a potential slowdown in eurozone growth weighed heavily on many global asset classes.

In Shanghai, the composite index fell to its lowest close for a year as investors continued to fret about the eurozone and internal governments moves to slow the booming property market.

In the UK, the new coalition government said that it would outline £6 billion of spending cuts for 2010 next week, which perversely may benefit equities as it should remove uncertainty and keep our credit ratings stable.

The Vix volatility index, a commonly watched gauge of investor risk aversion and often referred to as Wall Street’s fear gauge, has advanced sharply recently. After reaching three year lows earlier in April the fear index has risen almost 200% to settle at its highest level for over a year.

Technical analysis shows that the falls experienced on the blue chip index since mind- April are now over 14% and after breaking below initial support at 5400 and 5180, the index is trying to hold onto the key psychological 5000 level.

The relative strength index (RSI) has remained above its recent low, which was reached when the index hit 5120 and this divergence is encouraging as it indicates that the selling momentum behind the recent weakness is declining. The index may test below 5000 briefly, but I remain a buyer of this weakness unless 4950 is breached. If this scenario occurs then there is very little support until 4500.

The lingering ash cloud has also continued to cause disruption at many airports throughout Europe and travel related stocks have been heavily affected. Thomas Cook Group (Epic: 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 has 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.

This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Thomas Cook Group, but client accounts may. The material in this report has come from Simply Charts and Thomas Cook’s corporate website.