The Motley Fool

Are Tui AG And PZ Cussons plc Value Plays Or Value Traps?

Shares in travel company Tui (LSE: TUI) have soared by as much as 7% today due to the release of a positive set of full-year results which beat expectations. In fact, sales increased by 8% versus the same period last year and pretax profit surged by 37% on an adjusted basis.

This is excellent news for the company in its first year post-merger and shows that, while the market was rather uncertain about the its performance due to geopolitical challenges during the period such as terrorist incidents, Tui continues to perform well.

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As a result, the company’s dividends have been increased by 70% and this puts Tui on a yield of 3.4%. While lower than the wider index’s yield, the sharp rise in dividends shows that Tui’s management team is confident in its future outlook and, looking ahead to the current year’s performance, it is forecast to increase its bottom line by a whopping 66%.

Despite such strong growth prospects, Tui trades on a price to earnings (P/E) ratio of just 16.6 which, when combined with its earnings growth rate, equates to a price to earnings growth (PEG) ratio of only 0.25. This indicates that there is considerable scope for share price gains in 2016 and beyond.

Certainly, there are risks ahead for Tui, with the global macroeconomic and geopolitical outlook being highly uncertain at the present time. And, as a cyclical company, there is always a risk that earnings forecasts are significantly downgraded if the company’s outlook worsens. In Tui’s case, though, it appears to have a sufficiently wide margin of safety given its risk profile to warrant investment, thereby making it a value play, rather than a value trap, at the present time.

Also reporting today was consumer goods company PZ Cussons (LSE: PZC). Its update was generally in-line with expectations, but there was some disappointment due to challenging market conditions in its key market, Nigeria, as well as in parts of Asia. In fact, weak economic conditions in Nigeria have led to a decline in consumer disposable incomes and this has impacted upon sales in PZ Cussons’ electricals business.

Partly due to this, the company’s earnings are set to rise by just 3% in the current year, but growth of 8% next year has the potential to improve investor sentiment following a fall in PZ Cussons’ share price of 5% since the turn of the year. This share price fall has caused the company’s P/E ratio to dip to just 15.8 which, when compared to other global consumer goods companies, is very low.

However, while PZ Cussons is relatively cheap, has a number of premium brands and could deliver strong earnings growth over the medium to long term, it still has an overreliance on one market: Nigeria. Certainly, in the long run this could prove to be a benefit since Nigeria has excellent growth prospects. But, with its economy still offering a high degree of uncertainty in the shorter term, it could be prudent to watch, rather than buy, PZ Cussons at the present time.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of PZ Cussons. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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