Is this UK stock a once-in-a-lifetime opportunity or a value trap to avoid?

Stephen Wright is looking at a UK stock that’s down 75% over the last five years. With demand for its products high, is a recovery on the cards?

| More on:

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.

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Key Points

  • Strong travel demand in 2023 are pushing TUI shares higher, but I think the stock is a value trap
  • Even if the business can get its operating income can back to 2019 levels, I think its debt and share count are a problem
  • Higher interest rates also make it difficult for the company's stock to trade at the levels it did previously

Shares in TUI (LSE:TUI) are up 16% since the start of the year. If a post-pandemic travel recovery can push the stock back to where it was in 2019, there’s a potential 180% gain for investors.

I think this is unlikely, though. Rather than a once-in-a-generation opportunity, this looks to me like a value trap.


In 2019, TUI generated £402m in operating income and its share price reached £4.58. This was the product of three things. 

First, the company’s low level of debt meant that most of its operating income flowed through to its bottom line. £402m in operating income translated into £371m in net income.

Second, the company had around 1.1bn shares outstanding. As a result, £371m in net income meant 34p in earnings per share (EPS).

Third, interest rates were at 0.75%. Consequently, investors were willing to pay a price-to-earnings (P/E) ratio of 13 for the company’s stock. 

None of these things is the case in 2023. The company has much more debt, far more shares, and interest rates are significantly higher.

This means that I don’t see the stock heading back to its 2019 levels any time soon. Even if travel demand means TUI’s operating income gets back to £402m, I think there are ongoing problems.


The first problem for me is the company’s balance sheet. The interest payments TUI makes on its debt have gone from £69m in 2019 to £401m last year.

As a result, if the company makes £402m in operating income today, that won’t leave £371m in net income. As I see it, it will leave almost nothing after the company has made its interest payments.

I therefore doubt that a return to pre-pandemic operating levels would mean a return to the net income levels of 2019. But even if they do, there’s another problem.

Back in 2019, £371m in net income equated to 34p per share. But TUI has increased its share count by 63%.

That means that £371m in net income now equates to 21p in EPS. Applying a P/E ratio of 13 to that number still leaves the stock some way short of its 2019 levels.

The last problem for TUI shares has nothing to do with the company’s intrinsic features. Interest rates are now much higher than they were in 2019. 

Instead of 0.75%, the Bank of England base rate is now 3.5%. And with inflation still high, that rate looks set to rise further.

As a result, investors are paying lower multiples for stocks than they were before. And this makes me doubt that TUI shares will trade at the same P/E ratio as they did in 2019.

Value trap

TUI shares are currently benefitting from a resurgent demand for travel. And this might well push the stock higher in the near term.

As an investor, though, this just doesn’t add up for me. Even if it can recover its 2019 levels of operating income, the business faces significant headwinds.

TUI’s debt is lowering its net income, its share count is weighing on its EPS, and higher rates make it unlikely to trade at its previous P/E ratio. Each of these is a big problem.

The stock is down 75% over the last five years. But everything about this looks like a value trap to me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK 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.

More on Investing Articles

Investing Articles

£20,000 in savings? Here’s how I’d target a £2,219 monthly passive income with FTSE 100 shares

Investing in FTSE 100 shares can be a great way to turn a regular investment into a life-changing passive income…

Read more »

Investing Articles

These are the most popular 2024 Stocks and Shares ISA picks so far

After a few tough years, it looks like the 2024 Stocks and Shares ISA season is getting off to a…

Read more »

Investing Articles

This FTSE 100 ETF may be the simplest way to become a stock market millionaire

Ben McPoland considers one very straightforward stock market investing strategy that could lead to a million-pound portfolio.

Read more »

Investing Articles

I’d buy 11,220 Legal & General shares for £200 a month in passive income

Our writer considers how much money investors would have to put into Legal & General (LON:LGEN) shares to target £2,400…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

These 2 magnificent FTSE 250 shares are on sale right now!

These FTSE 250 companies still look cheap, despite recent share price gains. Here's why our writer Royston Wild thinks they’re…

Read more »

Blue NIO sports car in Oslo showroom
Growth Shares

Down 36% in 2024, how low could NIO shares go?

The electric vehicle sector has seen some tremendous volatility in recent years, but what does the future hold for NIO…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

£5,000 in savings? Here is how I would invest in income shares

This Fool has been searching for ways to generate a passive return via income shares.

Read more »

Market Movers

The Keywords Studios share price just jumped 63%. Time to sell?

The Keywords Studios share price has soared on the back of takeover talk. Here, Edward Sheldon explains what he’d do…

Read more »