Earnings look ahead: Next, Thomas Cook, TUI

Retailer Next and travel firms Thomas Cook and TUI are in focus for earnings updates next week.

Source: Bloomberg

Next (first-half earnings 25 September)

First-half earnings are expected to see Next report a 3.4% rise in earnings, to 430p per share, while revenue rises 3.1% to £4.2 billion. The firm has beaten earnings in seven of the last eight reports, but missed revenue in five of the last eight.

The lack of real sales growth despite a better environment for consumer spending raises the prospect that it will have to cut store numbers to reduce costs in the longer term. A push to larger stores has not had the desired effect and, as so often, it is the online arm that provides the positive investment case and a measure of protection against downturns in high street sales. It still looks the best in class among the traditional retailers, and its size gives it the ability to compete against ASOS and others.

At 11.9 times forward earnings it is below the five-year average of 13.8, and a healthier operating margin of 18% versus a comparable peer average of 8.7% provides a positive story. However, sales growth over the next three years is expected to be 3.9% versus 15.3% for its peers.

Next shares find themselves at the bottom of the rising channel from the June 2017 lows. This channel has been respected several times since then, most notably in June and July, when the price neared £62.00 and then dropped back. If the channel holds then a rebound may well commence, with £56.15 and £57.60 as the first areas to watch. A break lower targets £51.00 and then £50.05 in the near term.

Thomas Cook (Q4 update 25 September)

The UK heatwave hit demand for foreign holidays, prompting an August profit warning from Thomas Cook. Investors will be hoping that the firm can give some positive colour about the outlook for the next year, and given that half-year numbers were positive there are reasons to be hopeful. Net debt continues to fall, as cash flow rises, but like TUI the recent turmoil in Turkey may provide yet another hit to performance.

At 6.7 times forward earnings the shares are back to the low valuations of 2016, and are well below the 9.4 five-year average, but the firm continues to struggle in a competitive market, with these conditions unlikely to change for the foreseeable future.

Thomas Cook’s rally from the 2016 lows saw it gain 186.7%, but the current sell-off, which shows no sign of abating, has wiped out half the share price from the 2018 high. Further declines target 64.6p and then 52.2p, while a rally needs to clear recent resistance around 86p to suggest a broader move higher is in play.

TUI (Q4 update 27 September)

TUI’s update comes after a healthy bounce for the first nine months of the year, when underlying profits rose to €34.8 million from a paltry €7.3 million a year earlier. A decline in third quarter (Q3) profits hit the shares, with air traffic control strikes and disruption in Turkey hitting performance. However, it left full-year guidance unchanged, so investors are expecting a better performance this time around. Investors should watch out for any further weakness in Turkey, either due to lower bookings or a hit from currency fluctuations, but overall, summer bookings were up 4% over the year.

At 11.3 times forward earnings the shares are at their cheapest level in over a year, having become steadily cheaper since May. A solid dividend yield of 4.1% is higher than the competitor average of 1.6%, while the payout is covered 1.7 times over by earnings.

Since the price broke below the post-June 2016 rising trendline, we have witnessed a sequence of lower highs and lower lows. While a bounce has been seen since the September low, it would need to close above £15.00 to break the previous swing high. Any rally that fails to clear this hurdle remains a selling opportunity, with £13.09, £12.86 and then £12.37.

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