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He TUI (LSE:TUI) share price has had a really tough few years. The pandemic led many companies in the travel sector to difficulties, as customers were forced to stay home and revenue was significantly reduced. Many companies in the sector have seen their share prices begin to rebound, but TUI’s share price continues to fall, what is happening?
Some difficult years
TUI shares have had one of the worst performances on the market. FTSE 250 since the pandemic. Since the company focused primarily on hotels and leisure resorts, there was incredible uncertainty surrounding the future of the sector. No one knew if the world would be the same again and companies were forced to take extreme measures to survive. In the case of TUI, this led to adding a huge amount of debt to the company’s balance sheet.
With debt of £1.5bn, compared to the company’s overall market capitalization of £2.1bn, there isn’t much room for manoeuvre. In the last year alone, to raise money, the number of TUI shares has increased by 184%, meaning that existing shareholders have seen the value of their ownership fall significantly, in addition to the losses seen in the share price.
This is the distinction between TUI and the rest of the companies in the sector that have suffered less with respect to their share price. TUI placed a heavy burden on shareholders to help the company through the worst of the pandemic, while other companies had cash reserves to endure a temporary downturn.
Why might investors be interested?
It’s not all bad news. As much as the company’s debt and stock dilution have spooked investors, there are some good signs for the future. Compared to the travel sector, TUI stock has a price-to-earnings (P/E) ratio of 12.1 times, well below the average of 27 times. Furthermore, a discounted cash flow calculation puts the fair value of TUI shares at £11.31, considerably above the current price of £4.14. So as much as things seem shaky for the business right now, there could be a tremendous opportunity for investors willing to play the long game.
Now that the worst of the pandemic is hopefully behind us, the question is how the company will address its massive debt load. Travel is clearly back on the menu, and with annual earnings growth estimated at 32%, there’s every chance TUI can regain a dominant position in the sector. The question will be whether competition will advance faster, with an industry average of 34% annually.
With such a heavy debt load, TUI may find it difficult to compete as interest payments become a large part of the company’s operations. However, with a return on equity of 34%, TUI is very efficient with shareholder investment, above the industry average of 8%. If TUI can innovate and run a slick operation over the next few years, it has a good chance of making debt less problematic, bringing enthusiasm back to investors.
I am buying?
As much as TUI’s share price could be an opportunity, I don’t want to get involved with a company that has such a large amount of debt relative to its size. For now I will stay away from TUI stock.
