Beware my blogs.
Last December, the beginning of the end started for Thomas Cook, when it had to pre-warn on its results the day before the planned date. In my blog then I concluded – “once you have lost control of your communications… there may be only one way that the share price can go”. This has all played out now and, after the news over last weekend, the shares have been delisted.
What lessons can we all learn from this sad saga?
Firstly, a strong brand name, and a near 180 year history, does not mean you have a reason to exist. Great names like Woolworth have already disappeared from the High Street; in a fast changing world, where a tour operator’s raison d’etre is being eradicated by our ability to use technology to book directly, we should not be surprised that a business model ends up appearing to have very little value.
Secondly, management’s role looks set to be increasingly under scrutiny when things go wrong. The company did enjoy a couple of years in the FTSE 100 some 10 years ago but I think fair to say that it was never seen as a blue chip investment. And yet the calls for an investigation of senior management’s role, and especially of its remuneration, have become very loud.
Thirdly, there is a risk of a downward spiral of confidence among different stakeholders, once things start to go wrong. After the December warning it looks as if the company faced increasing pressures on its debt levels, perhaps as suppliers were more loathe to give credit. In today’s world of social media and 24/7 news, there is nowhere to hide anymore. Indeed, media reports over the weekend suggested that the company needed to find an additional £200m of financing at the eleventh hour on top of its original plans in order to avoid liquidation.
Fourthly, under closer scrutiny themselves, auditors are being much more hands on. This increases the risk of a nasty surprise in the run-up to results, eg in the case of Thomas Cook the company ended up having to pre-release with a warning. Alternatively, this could lead to results being delayed until an audit query is resolved. Only last Friday the stevia manufacturer PureCircle PLC had to announce it was pushing back its imminent results due to discussions with the auditors on stock values, resulting in the share price falling 40%.
Fifthly, do not forget that we have been in a bull market for some 11 years now, with many commentators indicating that this may be coming to an end. When the tide is rising, it has been easy for the reefs under the surface not to be visible. That might change as the water level falls. As an ex-analyst, one thing that struck me about the Thomas Cook balance sheet is that the company was funded by negative working capital, due to high creditors and advance payments for holidays, leaving negative equity on the last balance sheet published in March. That could be described as an efficient balance sheet, but it does leave the company vulnerable when times start to change.
To continue the sea-faring analogy, we do seem to be entering some choppy waters, economically, politically and from a Stock Market perspective. In this environment, companies need to focus on scenario planning and ask themselves “what if” questions on a regular basis, whilst being mindful that any negative news could spiral out of their control very quickly. Working closely with advisors and auditors, they should extend the planning process, eg for results, and not assume in their forward budgeting that the world in 2020 will be as benign as it was in 2019.
Otherwise, as with Thomas Cook, management might end up with an extended holiday.