Shares in Tui Travel (LSE: TUI) have struggled to move higher over the past 24 months. However, after this turbulence, it looks as if the business is finally gaining traction.
Tui has been floored by the grounding of Boeing’s 737 MAX plane. Towards the end of last year, the company warned the fallout from this could cost it up to €400m in 2020, if the plane doesn’t return to service by April.
Diversification
It’s impossible to tell if the plane will be allowed to fly again in the next few months. So, from an investment perspective, it might not be sensible to bet on this happening. Nevertheless, the rest of Tui’s business seems to be performing exceptionally well.
The company has also benefited from the collapse of rival Thomas Cook. The world’s largest travel operator has been able to grab customers away from the failed business since its demise last year.
Recent trading updates from Tui show just how much of an impact management efforts to try and stimulate growth have had.
Its fiscal first-quarter results, published earlier this week, showed a 7% increase in turnover for the period. In addition, the company’s loss over the vital winter period declined by 6% and the loss per share improved by 8%.
Travel companies tend to make a loss over the winter because clients tend to travel and pay for holidays in the summer. Tui has been trying to reduce the seasonality by growing out its cruise business.
In fact, the cruise operation was the only profitable segment of operations in its first quarter, apart from the Holiday Experiences business.
To this end, Tui recently announced the acquisition of Hapag-Lloyd Cruises for an enterprise value of €1.2bn. This should help the business further reduce seasonality and improve overall earnings growth.
Undervalued
A further reduction in earnings volatility could drive the share price much higher. At the time of writing, the stock is dealing at a price-to-earnings ratio (P/E) of 9.6 compared to the sector average of 18.2. That implies the shares offer a wide margin of safety at current levels.
It’s also dealing at a price-to-sales ratio (P/S) of just 0.3, compared to the industry average of 1.5. These metrics imply that shares in the holiday business could be undervalued by as much as 400%.
On top of this potential for capital gains, Tui also offers a dividend yield of 4%. The distribution is covered 2.6 times by earnings per share. That suggests Tui has plenty of headroom to increase the distribution further. There’s also plenty of scope to continue reinvesting profits back into the business.
As such, now could be a great time for investors to snap up shares in this travel business at its discount valuation. The company is driving with the brakes on at the moment as it deals with the costs from the 737 MAX grounding.
When this issue is dealt with, earnings could take off. That could drive a substantial re-rating of the shares from current levels based on Tui’s current undervaluation.
