Don’t Book It, Definitely Don’t Thomas Cook It: Thomas Cook shares “worthless”

July 10, 2019

2 min read

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What's going on here?

In May 2019 shares in Thomas Cook fell by 30% and the airline has continued to face troubles since.

What does this mean?

Thomas Cook has been struggling for a while. Now, Thomas Cook’s debt almost equals the worth of the airline and its operating profits (around £738m). Moreover, a day after the airline issued its third profit warning in less than a year, Citigroup branded the shares in the company ‘worthless’.

The company is desperately seeking to raise funds and reduce its costs. In their attempts to do this, they are currently in the process of seeking bidders for 105 of their jets. They have also closed 21 of their high street stores and put their currency arm (Thomas Cook Money) under review.

However, despite these actions, Citigroup warned Thomas Cook’s poor performance could ‘unsettle consumers and drive further weakness in bookings’.

What's the big picture effect?

This is a great demonstration of key company law principles and what happens when a company isn’t run efficiently. A company’s share price is determined by dividend discount models. This is the concept that a stock’s current price equals the sum total of all its future dividend payments when discounted back to their present value.

The price of stock does not just reflect the current worth of the company, but also reflects what level of growth investors can expect from the company. The biggest factor affecting a share price is supply and demand. The more demand there is for a stock, the higher the price will rise. However, if the supply is greater than the demand, the price will fall.

News and reputational concerns surrounding a company can also its affect share price. In the case of Thomas Cook, the £1.5b half year loss and third profit warning will have contributed to the general negative impact on their shares.

In an attempt to shift some of the blame, Thomas Cook has tried to blame political unrest for its troubles, i.e. the conflict in Turkey. They have also argued that many consumers have begun delaying holidays until after Brexit is resolved. Further, the increased competition from online travel agents and low-cost airlines will have undoubtedly affected Thomas Cook’s performance. However, identification of the problems alone will not save the company.

Although there has been ‘multiple bids’ for the airline, Lufthansa and Jet2 have indicated that they will not be pursuing this opportunity. Thomas Cook’s biggest shareholder, Fosun Tourism Group (18% share) has shown interest but is yet to make a formal bid. Therefore, it is unclear whether this is just a turbulent time for Thomas Cook or whether they might take a permanent vacation.

Report written by Natasha Dawes

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