Bookings of foreign holidays may be tapering off as the British weather sizzles and the vogue for ‘stay-cationing’ comes into its own but Thomas Cook’s (TCG) horizon remains relatively cloudless ahead of its third-quarter interim management statement (1 Aug).

While James Hollins at Investec acknowledges the £2.2 billion cap’s late bookings are likely to be soft, he nevertheless maintains the group should break even on the back of strong early market business, ‘while the third quarter itself to 30 June should show the impact of reduced capacity and higher yields.’

It is also probably worth bearing in mind that while the current heatwave may be impacting bookings, most of Britain endured Baltic conditions until well into the late Spring and this may well be reflected in the third-quarter bookings figures.

The group’s half-year figures to March confirmed Thomas Cook’s voyage along the road to recovery remained on track. First-half losses were reduced
by £58.7 million year-on-year to £197.5 million, assisted by better-than-expected cost savings. Underlying gross margins improved by 110 basis points to 20.7%.

Self-help and simplification have been the order of the day since chief executive officer (CEO) Harriet Green’s appointment in July 2012 but the group may not quite be off the critical list just yet even if it is out of intensive care. Investors should keep an eye on how Thomas Cook deals with its targets and key performance indicators (KPIs) as the travel company strives to hit 2015 full-year targets. Web penetration for example stood at 34% for the full year 2012, and 35% in the first half, against a target of 50%-plus by the end of 2015.

Morgan Stanley dubs Thomas Cook shares ‘the cheapest stocks in our universe’, and adds it ‘is trading at around a 30% discount to competitor TUI Travel (TT.)’.

TUI Travel does look to be the better company: in terms of higher exclusive product mix and higher online sales, the German travel giant is the clear front-runner, as reflected in its superior profitability and dividend yield.

Yet the valuation disparity accounts for this Thomas Cook’s cost-cutting measures should add significantly to the bottom line. Hollins projects that ‘there could be an additional incremental boost to the group’s cost-out targets - the 2015 target was raised to £390 million from £350 million at the time of first-half results on 16 May’. Hollins goes on to suggest that ‘total’ savings could be closer to £500 million by 2015.

Shares says: Sentiment is warming toward this turnaround candidate and decent numbers could fuel further share price gains.

SWOT ANALYSIS

STRENGTHS

• Strong brand

• Self-help strategy

• Improving cashflow

WEAKNESSES

• Debt remains high

• Online underperformance

• High exposure to Europe

OPPORTUNITIES

• Improved web penetration

• Better consumer sentiment

• Lower capacity to drive prices higher

THREATS

• The trend towards ‘stay-cationing’

• Economic downturn

• Jet fuel prices