It’s been a disappointing year for the travel and leisure sector, with shares in a number of the sector’s big names falling throughout the course of the year.
However, having released an upbeat set of results today and seeing its share price fall by 7% since the turn of the year, is now the right time to buy TUI Travel (LSE: TT), or are sector peers such as Thomas Cook (LSE: TCG), easyJet (LSE: EZJ) and IAG (LSE: IAG) better companies to buy a slice of?
Strong Pre-Merger Update
Ahead of its merger with major German shareholder, (also called) TUI, TUI Travel has posted a strong set of results that show the company is heading in the right direction. For example, the company expects operating profit to increase by at least 9% in the current financial year and was able to sell most of its summer holiday deals across Europe. Indeed, the only blot on the company’s copybook is a £27 million provision against the loans made to its joint venture in Russia and Ukraine.
Growth Potential
As mentioned, TUI Travel is due to post strong earnings growth in the current year and, despite this, shares in the company are still fairly cheap. For instance, they trade on a price to earnings (P/E) ratio of just 12.4, which equates to a price to earnings growth (PEG) ratio of 1.3. That’s impressive and shows that TUI Travel offers upbeat growth prospects at a reasonable price.
Sector Peers
However, after the large fall in share prices already mentioned, the wider travel and leisure sector also offers great value for money right now. For example, Thomas Cook trades on a P/E ratio of just 12 and yet is forecast to increase earnings by 56% next year. This puts it on a PEG ratio of just 0.1, although it should be pointed out that, unlike TUI Travel, Thomas Cook has been loss-making in each of the last three years.
Indeed, IAG has also experienced a turbulent period in recent years. The company is due to return to profitability in the current year, though, and is expected to follow this up with earnings growth of 48% next year. This puts it on a PEG ratio of just 0.2, which is hugely appealing.
Meanwhile, easyJet seems to offer the best of both worlds. It has been hugely profitable in each of the last five years and, furthermore, is forecast to increase net profit by 12% in the current year and by 11% next year. Trading on a P/E ratio of 12.3, this equates to a PEG ratio of 1.1 – slightly lower (and, therefore, more attractive) than that of TUI Travel.
So, while there is undoubtedly huge potential and great value in all four companies, easyJet seems to offer the most potent mix of earnings reliability and growth at a reasonable price. As a result of this, and the uncertainty that inevitably comes with a merger, it looks to be a better buy than TUI Travel.
