Shares of TUI (LSE:TUI) have plunged due to the Covid-19 crisis. They are dirt-cheap, no doubt. But are they a bargain or a value trap?
Cheap shares?
Even though several economies are slowly opening up, many people still are not booking flights or foreign tours. So, TUI is still facing a major challenge. That’s why the share price has not fully recovered yet and is still down about 40%.
The question that matters here is whether the tourism company is sound and can weather the crisis. In other words, is it healthy enough? Was it in great shape before the Covid-19 crisis?
TUI’s fundamentals
The latest tourism news inspires some hope. TUI resumed operations in Germany on 18 May and in Austria on 2 June. Still, not all the countries are opening up for tourists yet.
As my colleague Rupert Hargreaves pointed out, in spite of all the reopening taking place, there is no guarantee that the tourism sector will return to the same level of activity as before the pandemic. Credit rating agency Moody’s seems to share this view.
On 20 May the agency downgraded TUI’s credit rating to Caa1 junk. This is a very bad credit rating. The agency pointed out that the demand for holiday tours will most probably stay low even after removal of all restrictions. This is because of the prolonged recession. Many people will not have enough cash to spend on holiday tours. Moreover, many consumers may also be wary of traveling for health reasons. The agency thinks that due to tour cancellations, TUI will end up having a negative cash balance in 2020. Moody’s estimates that it will total -€3.5bn to -€4bn. So, there is a lot of uncertainty as to whether the company will remain solvent for another 12 to 18 months.
As concerns the tourism company’s performance before the pandemic, it was profitable and paid its shareholders dividends. TUI’s revenue performance was quite strong in its holiday experiences division. Turnover from hotels and cruises – part of the holiday experiences division – grew by 4%. The turnover of the markets and airlines division, however, only grew by 1%. In this division there was no profit growth either. TUI explained that the grounding of the 737 MAX was the main reason for this. However, I don’t see how the grounding of 737 MAX could have significantly affected the department’s revenue. Another problem with the company’s 2019 results is TUI’s reference to one-off charges and non-recurring losses. Businesses sometimes do this to hide poor performance.
The global tourism industry overall did not show magnificent growth in 2019. It only grew by 3%. So, it is not a high-growth sector generally even during ‘good’ times.
This is what I’d do with this cheap stock
I’d personally avoid this company’s shares. In my view, TUI is more appropriate for very patient investors who are willing to take on additional risks.
I think that UK investors would do much better by choosing either stable income companies with better balance sheets or high-growth firms.
