The TUI (LSE:TUI) share price has had a really rough few years. The pandemic led so many companies in the travel sector into difficulty, as customers were forced to stay at home, and revenues were cut significantly. Many companies in the sector have seen their share price start to rebound, but the TUI share price is still falling, so what’s going on?
A difficult few years
TUI shares have been one of the worst performers on the FTSE 250 since the pandemic. With the company primarily focussed on leisure hotels and resorts, there was an incredible amount of uncertainty surrounding the future of the sector. Nobody knew if the world would ever 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 £1.5bn of debt, compared to the overall market cap of the company at £2.1bn, there isn’t much room for manoeuvre. In the last year alone, in order to raise money, the number of TUI shares increased by 184%, meaning that existing shareholders have seen the value of their ownership drop significantly, in addition to the losses seen in the share price.
This is the distinction between TUI and the other companies in the sector that have suffered less with respect to share price. TUI placed a heavy burden on shareholders to help the company through the worst of the pandemic, whereas other companies had the cash reserves to tolerate a temporary downturn.
Why might investors be interested?
It’s not all bad news. As much as the debt of the company and share dilution has likely spooked investors, there are some good signs for the future. Compared to the travel sector, TUI shares have a price-to-earnings (P/E) ratio of 12.1 times, much lower than the average of 27 times. Furthermore, a discounted cash flow calculation puts fair value of TUI shares at £11.31, considerably above the current price of £4.14. So as much as things look shaky for the business at the moment, there could be a tremendous opportunity for investors willing to play the long game.
With the worst of the pandemic now hopefully behind us, the issue becomes how the company will tackle its enormous debt burden. Travel is clearly back on the menu again, and with annual growth estimates for earnings at 32%, there’s a good chance TUI can claw back a commanding position in the sector. The question will be whether competition will move faster, with a sector average of 34% per year.
With such a heavy debt burden, TUI may struggle to compete, since interest payments become a large part of the company’s operations. However, with a return on equity of 34%, TUI is highly efficient with shareholder investment, above the sector average of 8%. If TUI can innovate and run a slick operation for the next few years, it has a good chance of making the debt less of an issue, bringing back investor enthusiasm.
Am I buying?
As much as the TUI share price may be an opportunity, I don’t want to be involved with a company holding onto such a large debt relative to its size. I’ll be staying well clear of TUI shares for now.
