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As the last rays of summer sunshine fade and many tourists reluctantly pack away their bathing suits, I'm turning my attention to the TUI (LSE:TUI) share price. Is the European travel giant destined for a winter slumber or could there be an opportunity here? Let’s take a closer look.
A few years full of challenges
The firm has been on a theme park-worthy rollercoaster ride in recent years. Over the past year, shares have risen by a steady 6.7%, but remember that's a mild rise in what has been a collapse of epic proportions. Since 2019, shares have plummeted by a staggering 78%.
The numbers
Despite disappointing market results, the summer of 2024 has been a relative breath of fresh air for the company. After returning to profit in 2023, annual revenues grew over the past year by 23% to a whopping €22.22 billion. Over the same period, while many companies in the hospitality and travel sector were suffering from a drop in revenue, profits reached a respectable €539.3 million.
With a price-to-earnings (P/E) ratio of just 5.4 times, there is a considerable gap between the company and the average valuation of the sector, which stands at a whopping 27.3 times. I think there could be a decent opportunity here if the market decides that the stock deserves to catch up with the company's performance.
If so, there is plenty of room for growth. A discounted cash flow (DCF) calculation suggests growth of up to 74% before a fair value estimate is reached. With annual earnings forecast to grow by a healthy 15.83% over the next five years, analysts predict an average 12-month target price of 739.79p, suggesting potential growth of 31.28%.
Of course, this is not guaranteed. I suspect there is a good reason why the market is not very confident that these forecasts will come true.
A complicated sector
Consider the potential turbulence ahead. The company's debt-to-equity ratio stands at a dizzying 154.8%. This $1.9 billion debt pile could become TUI's personal Everest if the economic winds change direction, especially when interest rates are near their highest in decades.
As many of us know, the travel industry is notoriously fickle, susceptible to everything from geopolitical tensions to the whims of Mother Nature. A volcanic eruption or a global crisis could send TUI’s recovery attempt into disarray.
An uncertain future
As we bid farewell to the summer of 2024, TUI finds itself in an interesting moment. On the one hand, a path of continued recovery and growth is in sight, leading to sunny profits and satisfied shareholders. On the other, a rocky road of potential setbacks and challenges lies ahead, threatening to push the share price down.
For me, TUI's share price looks like a good opportunity. It is true that the sector is challenging and the company's balance sheet is far from ideal. However, given the great growth potential, I will take a small investment at the next opportunity.
