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Thomas Cook is in big trouble

Thomas Cook is to postpone publishing its full-year results, because it needs more time to talk to its bankers about its debt. David Stevenson assesses the prospects for the troubled travel operator.

As you'll have noticed from the share price plunge, Europe's second-largest tour operator, Thomas Cook, (LSE: TCG)has come out with a shocker.

It was supposed to produce full-year figures on Thursday. Instead the firm has been forced to postpone the results to allow it more time to talk turkey with its bankers.

What's the problem? In short, Thomas Cook has too much debt and not enough income.

Net borrowings at the end of March came to £1bn while the firm made a £200m six-month loss. In the meantime, the boss has left and three profit warnings have been issued. And even since the last of these, trading has been "worse than expected", says interim CEO Sam Weihagen, due to the eurozone's woes and troubles in Africa and the Middle East.

No wonder the cash position has deteriorated yet further.

Last month, Thomas Cook tried to calm market fears by announcing that its banks had relaxed their loan conditions. But confidence has been crushed by today's statement: the shares have fallen by almost three-quarters since this morning. They're now down 95% in 2011.

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What's the outlook?

Today's statement suggests that more money will be needed to keep the troubled travel group going. That's because Thomas Cook's cash flow is seasonal, ie, fewer holidays are booked and paid for during winter.

Finance director Paul Hollingworth says he's "confident we'll get the full support of our lenders. The rational and right thing for them to do is to support Thomas Cook over this period until we can trade robustly in the peak season". But the stock price plunge shows there are fears the group could well breach its bank lending agreements before then.

What's more, today's announcement is "a terrible message to potential customers", says Wyn Ellis at Numis Securities. "Competitors are likely to take advantage of the opportunity to grab market share, leading to a potentially dangerous further downward trend in bookings."

What the analysts are saying

It's amazing, but before today almost 30% of analysts surveyed by Bloomberg were bullish. And more than 50% said 'hold' while just 19% were sellers. When analysts digest the latest news, that upbeat view is likely to be downgraded a long way.

Our view

We've been broadly cautious about UK consumer-related stocks for ages. So the recent slowdown in bookings at this firm comes as no great surprise. Sure, it's tempting to see a share that's dropped so far as a possible recovery candidate. But at Thomas Cook the risks still look too high. This looks like a stock to avoid.

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