In 2023, FTSE 250 company TUI (LSE:TUI) saw its share price fall by 22%. At first sight, though, it isn’t obvious as to why.
Like a number of holiday companies, the business saw its bookings, revenues, and profits all recover from the pandemic. But unlike other travel firms, the stock went down.
Post-pandemic (part 1)
All over the stock market, 2023 was a year of post -pandemic normalisation. Resurgent demand saw Rolls-Royce lead the FTSE 100 higher, while excess inventory in vaccine manufacturers caused Croda International to fall.
Elsewhere in the travel sector, easyJet and International Consolidated Airlines Group both saw their share prices surge. But TUI went the other way.
Things began brightly enough – the stock rose in January as the company announced that bookings were back above 2018 levels. And by the end of the year, revenues and profits followed.
That’s despite unusually hot weather causing wildfires in Rhodes and costing the company around £21m. So what did go wrong for TUI shareholders in 2023?
Post-pandemic (part 2)
TUI’s operations may have snapped back to their pre-pandemic levels, but its balance sheet didn’t. One of the big issues for the company at the start of the year was the amount of debt it had.
In order to repay a loan to the German government, the company announced in March it would be raising cash by issuing shares. As a result, the share count increased from 338m to 507m.
That’s a significant increase, but there are a couple of positives. One is that I thought the company’s communication with shareholders was outstanding – it was clear, straightforward, and honest.
As well as demonstrating good management, the share count raise also brought the company’s debt under control. The firm finished the year with net debt at 1.2 times cash profits, down from 2.8 times.
Outlook
Management’s forecast for 2024 is optimistic. The expectation is for bookings to grow by 11%, revenues to increase by 10%, and cash profits to be up 25%.
Considering where the company is at the moment, that would be extremely impressive and it would be hard not to see the stock as a bargain if that comes off. But I see reason for caution.
A look back over the last decade shows that TUI hasn’t put together three years of consecutive revenue growth during that period. That includes the pandemic, but isn’t the only reason.
The travel industry is highly cyclical and I’ve got an eye on a weak GDP situation for the UK in 2024. So while I hold TUI’s management in high regard, I’m cautious of the optimistic outlook.
A stock to consider buying?
At a price-to-earnings (P/E) ratio of 9, TUI shares look cheap. But I think that depends on the company’s earnings in 2023 not being a one-off.
I’m not convinced about this. With the UK on the edge of a potential recession, I’m hesitant about the outlook for the business in 2024.
I therefore think TUI is a risky FTSE 250 stock. Though, with the company considering delisting from the UK stock exchanges, it might not be a FTSE 250 company much longer.
