Shares in ailing travel firm Thomas Cook (LSE: TCG) have surged in value since the end of August as investors have bought into this recovery story.
Indeed, since the beginning of the month, the stock has jumped by more than 100%. At one point the stock had surged by more than 200%.
I’m not buying into this rally because Thomas Cook is in the process of completing a massive recapitalisation plan and full details of the scheme are not yet available. The £750m rescue deal will strengthen the group’s balance sheet, and a debt-for-equity swap is also being considered as part of the process.
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Management has already confirmed that “existing shareholders will be significantly diluted as part of the recapitalisation,” and it is currently unclear how or if existing holders might be able to take part in the recapitalisation.
“Shareholders may be given the opportunity to participate in the recapitalisation by way of investment alongside Fosun and converting financial creditors on terms to be agreed,” Thomas Cook said in its recapitalisation announcement.
All of the above seems to suggest that current shareholders could be wiped out in the recapitalisation. With this being the case, I’d make the most of the recent rally to sell shares in Thomas Cook and buy its fast-growing peer, On The Beach (LSE: OTB) instead.
Booming sales
On The Beach is one of the reasons why Thomas Cook has started to struggle in recent years.
The low-cost online holiday provider allows customers to book their own trips without having to go through a travel agent. By cutting out the middle man, On The Beach can offer holidaymakers much more for less, and customers are flocking to its offering.
Sales have grown at an average rate of 23% per annum since 2013, and net income has surged from £3.4m to £21.5m.
City analysts had been expecting the firm to report further earnings growth of nearly 40% for 2019, but unfortunately, it now looks as if the company will miss this target.
Buying opportunity
According to a trading update issued by the business today, On The Beach’s sales are suffering from sterling weakness. The company says that unlike its peers, it does not use currency-hedged pricing for the packages that it provides its customers. Therefore, as the value of sterling has declined, prices have increased, putting off customers. As a result, management now expects to miss its growth targets for the year.
In my opinion, this is just a small setback for the firm. On The Beach has been able to succeed thanks to its unique business model, investment in technology and efficient customer service. Management is still spending heavily in these areas and is not cutting back, despite headwinds. The group is consolidating its position in the market, according to the recent trading update, and refining its marketing tactics as well as the customer offering.
In my opinion, these efforts should help the company maintain its competitive position in the market and return to growth when currency volatility subsides. With that in mind, I reckon it could be worth making the most of today’s slump to snap up some shares in On The Beach as a long-term investment.
