I think this FTSE 100 stock is high risk, especially in the current market slump

This high risk stock may be one to avoid at this time.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Plane on runway

Image source: Getty Images.

Leisure, travel, and tourism is a risky business. It can be a very competitive and saturated market. There are also many external factors which can affect the success of such businesses. Fuel prices are usually a major talking point for airlines.

Of course, the most significant external factor currently is the global pandemic. 

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Coronavirus is causing day-to-day life to grind to halt, which is having a huge impact on the travel industry. Airlines are grounded, hotels are closed, and travel agencies are no longer taking bookings. With entire countries in lockdown and social distancing the current advice, the short-term prospects of travel companies aren’t positive.

TUI Travel (LSE:TUI) is one of the companies affected by the pandemic. The largest leisure, travel, and tourism company in the world, has taken a sizeable hit, like many of its counterparts.

In light of the recent events, TUI announced that 10,000 employees will have their salaries cut by up to 50%. The recent market crash has caused an approximate 70% decrease in the share price. 

Performance and recent events

Prior to the market crash and government lockdowns, early February saw TUI report a strong first quarter of trading. The three months to 31 December saw a 7.7% increase in turnover to €3.85bn as it benefitted from the collapse of main rival Thomas Cook. 

It is worth remembering that Thomas Cook’s market share in the package holiday market was a whopping 30%. This gaping hole created a vacuum that TUI and others frantically attempted to fill.  

TUI’s markets & airlines division in particular performed strongly with an 8% rise in revenue having capitalised on a surge of customers in the UK especially. This helped TUI shake off another €45m hit from the continued grounding of the Boeing 737 MAX.

What also caught the eye for investors in this update was a 14% rise in summer bookings compared to the same quarter last year. CEO Fritz Joussen’s comments displayed his surprise at such a turn of events saying that he “cannot remember any start in the year where that has happened”. Fast forward approximately five weeks and his company is facing another unparalleled event. 

Crunching the numbers & next steps

TUI has experienced some intriguing results, although in an industry I would usually stay away from when it comes to investment. Profit has increased for the previous three financial years, which is always a positive sign. Dividend per share has also increased year on year for the previous four years. 

The current price-to-earnings ratio sits at just under 25 compared to the FTSE 100 ratio of 12. Share price generally over the previous year, excluding this period of uncertainty, saw an increase of approximately 25%. 

That said, I do tend to stay away from airlines and travel operators. In the current climate I will continue to do so. I feel as though this pandemic will continue to challenge an already tricky industry to navigate, even if the tide does turn soon.

As always, I do not totally discount any stock. I’ll continue to keep an eye on TUI, and if an opportunity arises I would consider it. For the time being, though, it’s a no from me.

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Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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