Thomas Cook Group Company Financial Analysis - Example

Company Financial Analysis Company Financial Analysis Introduction Thomas Cook Group Company is a global travel organization that is based in Britain and listed at the London stock exchange. Thus, Cook Group Company operates under the hospitality, tourism industry. The firm was founded in 2007 when MyTravel Group Company and Thomas Cook and Son firms merged as one travel based firm. When the firm was merged, Arcandor Company that is a German department store and mail-order firm owned 52% of the shareholding while MyTravel firm owned 42%. However, Arcandor sold of its shares in the company in 2009 when it filed for bankruptcy. In undertaking its operations, the company owns tour operators and a chartered airline. Cook Group Company Financial Beta In investment financial analysis, beta is used in measuring the inherent risk of a given investment caused by exposure to the general market fluctuations instead of the idiosyncratic factors. Thus, the beta is used to predict the price volatility of a given stock when compared with market benchmark like FTSE 250 (Brigham & Houston, 2009). This allows an investor to sense the market risk of a given stock compared to the market performance. In measuring the volatility of a given stock to the market, a beta equivalent to 1 implies that the price of the stock has the tendency of moving with the market. On the other hand, when the beta of the stock is higher than 1 it means the price of the stock tends to be volatile more than the market benchmark it is compared against. Similarly, when the beta of the stock is less than one it implies that the price of the stock has the tendency of been less volatile compared to the market benchmark. A stock with a beta equivalent to zero implies that the value of the stock is does not change irrespective of the market movement (Brigham & Houston, 2009). The beta value of Thomas Cook Group Company has been calculated by using the stock prices of the company and FTSE 250 market index for the last five years. This is reflected in the attached spreadsheet excel employed in computing the change in price for the last five years. Thus, the beta value of Thomas Cook Group calculated in the attached spreadsheet excel reflects the volatility of the company’s stock when compared against the FTSE 250 market index. The calculated beta for Thomas Cook Group in the attached spreadsheet excel indicates that the firm has a volatility of 1.27 when compared against the FTSE 250 index. This implies that the stock price of Thomas Cook Group Company has the tendency of been more volatile compared to the average movement of the FTSE 250 shares. Thus, the stock price of Thomas Cook Group in the stock market has the tendency of increasing by a higher margin when the market prices are rising compared to benchmarked shares and dropping more when the market shares are dropping. This share price movement of the company share prices is essential for an investor in coming up with stock investment portfolio since he/she will be able to diversify across stocks with diverse volatility to spread investment risk. However, the beta value calculated in the attached spreadsheet excel differs from the reported beta value of the same company from Reuters market analysis website portal. The reported beta is higher than the calculated beta since it is 2.37 while the calculated beta is 1.27. One of the reasons that contribute to the difference between the reported beta and the calculated beta is the difference in the market index applied in the online reported beta computed and the market index selected in the calculated beta value (Brigham & Houston, 2009). The reported beta value could have been determined by using the FTSE ALL SHARE or FTSE 100 while the calculated beta value was computed using the FTSE 250. Consequently, the two beta values of the same stock price movement will differ since the stock price movement has not been benchmarked using the same market index. Similarly, the frequency at which the returns of the stock using the historical prices have been calculated causes the calculated beta value and the online reported beta value to differ (Brigham & Houston, 2009). The calculated beta value in the attached spreadsheet has been computed by using weekly returns of the Thomas Cook Group Company stock prices and FTSE 250 index. This could be different from the returns that have been used in the online reported beta value since it could be daily, monthly or annual. The difference in the timeframe of the returns used will yield different beta value for the same stock. Thomas Cook Group Share Price Performance vs. FTSE 250 Index The performance of the Thomas Cook Group share prices compared to the FTSE 250 index is depicted by the table and graph below. Annual Share price performance Year FTSE 250 TCG.L 2008 -39% 242% 2009 41% 13% 2010 29% -8% 2011 -5% -91% 2012 17% 302% 5-year return 28% -75% The illustration above reflects that performance of the Thomas Cook Group share price has not been favorable compared to the performance of FTSE 250. This is because the analysis reflects that the Thomas Cook Group has an average return of -75% in the last five years while the market index FTSE 250 has a market return of 28% from the share price changes. Even though Thomas Cook share prices have been able to reach very high returns in some annual returns, the return of the firm share price for the last five years has been lower compared to the market index FTSE 250 share price return. The low volatility of the FTSE 250 as demonstrated by the graph above compared to the volatility of the Thomas Cook Group share prices has seen the two yielding significant different average annual earnings in the past five years. The diversity in performance of the Thomas Cook share price in the stock market compared to the FTSE 250 market index can be contributed to the investment decision factor, dividend decision and financing decision factor. The two factors helps in demonstrating why the share prices of the company have been moving as reflected in the graph above. Investment Decision Factor Investors intending to invest in the stock market evaluate the investment decision undertaken by the various companies listed in determining the stocks to buy. This is because the investment decision or strategy adopted by the various firms helps in determining the ability of the firm in maximizing its earnings that is vital in increasing the earnings of the shareholders through future dividend payout. Consequently, the demand of a firm shares will increase as the firm undertakes investment decisions that have potential of enhancing its profitability in future operations. This will see the price of the company shares increasing due to the increase in demand of the shares while the supply of the shares remains stable. Similarly, the share prices will plummet when the demand of the shares fall due to lack of investors hope in the company in increasing their earnings in future due to lack of investment decisions by the management or poor investment decisions. Consequently, the movement of the Thomas Cook shares in the last five years has been influenced by the investment decisions undertaken by the management of the organization. In 2008 the share price of the company registered a significant growth of 242% while the FTSE 250 index share price return was low to -39% as shown in the table above. The high share price return performance in 2008 was contributed to the high hope the investors had on the firm in increasing the earnings in future after the merger investment decision on September 29 of 2007. Merger and acquisition strategies are viewed by investors to be instrumental in enhancing the earnings of the parent company due to increased diversity of skills and financial strength. Consequently, the merger decision by the management of the company motivated the investors to demand investing through the stock in the market to increase their potential of maximizing wealth in future. The high demand of the Thomas Cooks Group Company shares in the stock market caused the share prices to increase as the equivalent price of the share prices increased. However, the table above reflects that the annual share return in 2010 for the company dropped to -8% and -9% in 2010 and 2011 financial years respectively. The significant downward share price of Thomas Cook Group Company shares is attributed to the investment situation that was facing one of the major shareholders of the company Arcandor firm that was one of the firms involved in the merger process. Arcandor declared bankruptcy in the middle of 2009 that forced it to sell its shareholding in the company. The bankruptcy declaration by one of the leading firms owning the company raised negative market sentiments on the possibility of the firm collapsing in the near future. Thus, the demand of new investors willing to invest through the company shares dropped significantly while the shareholders of the companies started to sell the shares at low prices to minimize the possible capital loss if the firm goes underground in future. Consequently, the share prices of the company dropped down significantly contributing in 2010 and 2011 due to the low demand of the shares in the stock exchange for fear of hindering shareholders wealth maximization. However, the share prices in 2012 recovered as demonstrated in the table above that saw the annual return rising to 302% from the negative return the previous year. This implies that the demand of the shares in 2012 increased that caused the share prices to rise. The management of Thomas Cooks Group undertook a turnaround three year plan by closing unprofitable branches, sell businesses and cut jobs (Young, 2013). The investment decision by the management was viewed by the investors to be essential in allowing the firm to reduce the losses the firm had suffered due to the Europe debt crisis and high fuel that had been escalated by Tunisia and Egypt political turmoil. Thus, the investors in the market started to demand the share of the company at the current low prices in anticipation of earning high capital gains as the prices of the shares increase in future once the firm recovers. Owing to the increased demand of Thomas Cook Group Company shares in the stock market as the investors anticipate earning high capital gains in future once the company recovers from its previous loss making trend, the prices of the shares started to increase drastically (Brigham & Houston, 2009). This contributed to the high annual price returns of the company in the financial year of 2012 as reflected in the table above. Comparison of 5-year share price performance of Thomas Cook Group with share price changes since 31st Jan. 2013 to 20th Apr. 2013 The cumulative average share price return of Thomas Cook Group over the last five years is -75% while the return of the share prices in the last three years from February 1st in 2013 to April 20th 2013 is 73.57%. Thus, the capital gains accrued from the last three months of the shares is considerably higher compared to that of the last five years. This is because the investors who bought the shares at the beginning of the last three years have been able to earn a return of 73.75% of their capital investment by selling the shares while the investors who bought the shares at the beginning of the last five years have suffered a capital loss of 75% by selling the shares at the current market price (Brigham & Houston, 2009). The difference in the return of the two periods is due to different prices of the shares at the beginning of each period when compared to the current price of the shares in the stock market. The graph below depicts the movement of the stock prices of the company over the last three years. Reference Brigham, E. F., & Houston, J. F. (2009). Fundamentals of financial management. Mason, OH: South-Western Cengage Learning. Young, S. (2013). Thomas Cook upbeat on turnaround as disposals hit target. Retrieved 2014, from http://uk.reuters.com/article/2014/02/11/us-thomascook-results-idUKBREA1A0OV20140211?type=companyNews Read More