The TUI (LSE: TUI) share price has lost around two-thirds of its value this year. In the March stock market crash, shares in the travel giant plunged as it quickly became apparent that the coronavirus crisis would cause untold pain in the industry.
However, after this decline, the stock looks cheap compared to history. Today I’m going to take a look at the shares to see if they offer value at current levels.
Is the Tui share price cheap?
Shares in the travel giant are trading at one of their lowest levels in recent years. This does not necessarily mean that the stock is cheap on a fundamental basis.
More often than not, a low share price is a sign that the market does not believe in a company’s prospects.
This could be the case with TUI. Coronavirus travel restrictions have floored the business. Indeed, the company came close to collapse earlier this year.
Luckily, it was able to secure a last-minute £1.6bn bailout from the German government, which helped stabilise the TUI share price.
Unfortunately, it does not look as if the company will be able to get back on its feet any time soon. International travel has collapsed in the coronavirus crisis. As the situation continues to rumble on, it does not look as if activity in the sector will return to 2019 levels for at least 12 months.
These headwinds may continue to hold back the stock in the near term. City analysts are forecasting a €1bn loss for the group this year. Current forecasts suggest sales will rebound in 2021, but profits are not expected to follow suit.
As well as the sluggish earnings recovery, TUI is going to have to deal with its crisis borrowing. The company’s debt has exploded over the past 12 months. For example, at the end of its 2019 financial year, the group’s net debt was €909m. It is now nearly €6bn.
Risks ahead
With so much debt on the balance sheet, I think it might be sensible for investors to ignore the low TUI share price.
This debt could become a noose around the company’s neck, especially if interest rates start to rise. As profit remains under pressure, it’s unlikely the business will be able to reduce borrowing meaningfully either.
This is a toxic combination. One of the most common causes of business failure is excess borrowing. It now seems as if the TUI balance sheet is stretched to the limit. The company may have to conduct further cash calls or ask shareholders for new funds to keep the lights on in future.
Even if profitability does return to 2019 levels, the company may struggle to maintain its obligations to creditors. In 2019, it earned €416m. At this rate, it would take more than a decade to pay off its current debts.
Therefore, while the TUI share price might look cheap after the recent stock market crash, considering the risks facing the business, I think it may be sensible to avoid the stock for the time being.
