How to Spot a 178-Year-Old Firm's Collapse… 2 Years Ago

by Editorial Staff
Updated: September 24, 2019

The quick demise of the world's second-largest travel tour operator shows the speed with which credit deflation can overtake even Britain's longest-standing businesses. Thomas Cook Group began operations in 1841 as an organizer of railway outings for members of the local temperance movement. Over the past 178 years, the company ballooned into a global travel behemoth, boasting 22,000 staff in 16 countries, 19 million yearly customers, and £9 billion in annual sales. The company's shares, meanwhile, traded at nearly 150 pence as recently as last summer.

But as leisure shares fell alongside defense stocks and utilities, nearly two centuries of travel history ended in the blink of an eye. In just the past 12 months, Cook's investors have suffered through three profit warnings and watched the value of their stock plummet to 10 pence, a 93% decline. Some analysts argue that the shares are worth less than that. "Analysis by Citigroup, among other brokers, valued Cook's shares at zero following its first-half results announcement on Thursday." (Bloomberg, 5/17/19)

Bond investors have been wiped out, too, but at least they got fair warning from equities. The right-hand chart shows that Cook's 2022 6.25% notes gradually slid lower until late 2018. The bonds, which trade below 40 pence nowadays, only fell off a cliff after equities did.

So what happened? To believe the headlines is to believe that an unforeseeable confluence of catastrophic events came out of nowhere and sank a national travel treasure. According to BBC News, Cook ran into a series of problems, including rising global terrorism, competition from low-cost airlines, and a failure by company executives to spot the trend of "no-frills travel and what it has meant for people's holidays." (5/21/19) "It is a shame to see such a great brand name held in such contempt by the market," says one travel editor.

While these may all be contributing factors, the GMP quote atop Thomas Cook's equity chart ["Travel and leisure shares... display five waves up since 2009, thereby signaling an impending change of direction."] shows an easier-to-identify cause that dates back to July 2017. That month, when we spotted a near-complete five-wave rise in the FTSE 350 Travel & Leisure Index, we forecast that the index was due to turn down. The index bobbled along for 10 months following our forecast, but, in May 2018, prices finally broke, and a mere 20% decline was apparently all it took to take down Britain's over indebted travel giant. It's too late for Thomas Cook's investors, but for anyone still holding susceptible stocks or weak credits, take at least one of your summer vacation days to scrutinize your stock and bond portfolios. Use the finest of fine-tooth combs.

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