Thomas Cook Group crashes another 20%. Here’s a FTSE 250 stock I’d buy instead

It’s been a bad year for package holiday and airline operator Thomas Cook Group (LSE: TCG). A long hot summer meant Britons were reluctant to book holidays to southern Europe and North Africa. The company was forced to slash prices to attract bookings.

On Tuesday, the FTSE 250 firm issued its second profit warning in two months and suspended its dividend. The news has pushed the shares down by another 22% at the time of writing.

The Thomas Cook share price has now fallen by 70% so far in 2018. Should we start buying, or is this still a stock to avoid?

What’s gone wrong?

Although sales rose by 6% to £9,584m last year, underlying operating profit fell by £58m to £250m during the 12 months to 30 September. The main reason for this was an £88m fall in profits from the Tour Operator business, which was forced to offer heavy discounts late in the season.

Although profits rose by £35m at Thomas Cook Airlines, much of this was cancelled out by £28m of “legacy and non-recurring charges” at group level.

Shareholders will be disappointed that the dividend has been suspended, but a sharp rise in debt suggests to me that this was a necessary precaution. The net debt was £389m at the end of September. That’s nearly 10 times greater than the £40m reported this time last year.

Management said the company is still compliant with its banking covenants, but I think debt could become a serious concern if trading doesn’t improve quickly.

Good news on the horizon?

Chief executive Peter Fankhauser said that although the UK market remains very competitive, he’s confident the group will be able to report stronger profits and improved cash generation next year.

Analysts’ forecasts before today were for 2019 earnings of 8.9p per share. This would put the stock on a forecast price/earnings ratio of just 4.2. However, I suspect these forecasts will be cut after today’s news. With debt up sharply and an uncertain outlook, I plan to avoid this stock for now.

One stock I would buy

Pub chain EI Group (LSE: EIG) has already been through a tough restructuring process and is now delivering a steady recovery. Formerly known as Enterprise Inns, EI’s share price has risen by 30% so far this year.

The company’s estate is divided into three divisions. Managed Pubs are staffed and run directly by the firm. Like-for-like sales rose by 7.1% in this division last year, suggesting a strong performance.

The Publican Partnerships division operates tied pubs that are leased or run by tenant landlords. Finally, Commercial Properties owns pub and non-pub properties that are leased to independent businesses.

EI has indicated that it’s open to selling off some or all of the Commercial business. This could help accelerate debt reduction and leave the firm in a position to restart dividend payments.

The stock could still be cheap

In recent years, EI’s board has chosen to buy back shares rather than pay dividends. With the stock trading at a 44% discount to its book value of 334p per share, this approach makes sense. It provides excellent value for money and boosts the book value of its remaining shares.

Profits have now stabilised and the group’s cash generation remains excellent. I believe EI could deliver attractive gains over the next few years. I’d rate the shares as a buy.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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