Thomas Cook faces 'clearer skies' as Credit Suisse upgrades

After Thomas Cook's share price was grounded for nine months, Credit Suisse says it now sees clear skies ahead for the travel group as it upgrades its recommendation on the shares to 'outperform' on Wednesday.

Thomas Cook's stock has seen very little movement despite finalising key partnership signings with the likes of Expedia and LMEY, competitor bankruptcies over at Monarch and Air Berlin, or even after the FTSE 250 rolled-out more impressive self-help targets, analysts at the Swiss broker told clients.

After running the numbers on the basis of the company's new operating model and recent recovery, Credit Suisse saw the potential for faster earnings per share growth and a share price re-rating.

The new operating model had delivered more than £130m of gross benefits between 2015 and 2017 (albeit partially offset by cost inflation and investment) and Cook's management saw "significant streamlining" that Credit Suisse expected to manifest itself in the form of further savings in terms of people and technology, alongside further revenue synergies.

Credit Suisse also highlighted Thomas Cook's robust margins of 13.3% on an EBITDAR basis, versus 14.5% for EasyJet, returns of 20% on mid-life value, and management's clear strategic efforts to enhance profitability such as by increasing seat-only and long-haul sales, exiting from its Belgian operations and the creation of a low cost Majorca base as further examples of its growth.

"TCG's new reporting structure has led us to re-think our approach to setting our target price. Previously we had used a simple multiple based approach with reference to UK focused airlines but not implement a more comprehensive sum-of-the-parts approach," they said.

In addition to the upgrade from 'neutral' to 'outperform', Credit Suisse upped its target price on Thomas Cook shares to 160p from 112p.