The Motley Fool

Could TUI and easyJet shares be bargains of the year?

It’s been a rollercoaster ride for shareholders in easyJet (LSE: EZJ) and TUI (LSE: TUI) so far this year. Although both stocks have risen by about 20% over the last three months, easyJet shares are still down by over 40% this year.

TUI shareholders have fared worse, sitting on a year-to-date loss of more than 55%. Ouch!

However, as lockdown eases across Europe, we could see a return to short-haul travel and beach holidays. As I’ll explain, I think patient investors could see further gains from both stocks.

If TUI and easyJet can get back to their old selves, both shares could be cheap at current levels. After all, easyJet shares currently trade at just nine times 2019 earnings. TUI shares are on a multiple of just five times historic earnings.

However, history is the key word here. The new normal may not be the same as the old normal.

Airlines and travel firms have never had to completely halt their operations in the way we’ve seen this year. Both companies have been forced to take on extra debt to cope with the shutdown. Both are planning to slim down their operations and make big job cuts. The big falls we’ve seen in TUI and easyJet shares reflect this uncertainty.

Early signs are mixed

easyJet bosses have said they don’t expect air traffic levels to return to 2019 levels until 2023. They’re planning to cut the airline’s fleet size and have deferred new plane deliveries for several years.

However, TUI is taking a more balanced approach. Although the company is reviewing all of its operations, management said in May that UK bookings for this year’s winter season are 8% ahead of the same time last year. Bookings for next summer are also said to be “positive on small volumes.”

It’s clear many people still want to go on holiday. And while the UK looks set to enjoy a staycation boom, history suggests this won’t be a long-lived trend. If affordable foreign holidays are on offer, I believe many people will still want to travel.

easyJet shares vs TUI shares

Which of these travel stocks should you buy? I think it’s a finely-balanced decision, but my money would probably go on easyJet shares.

One reason for this is the budget airline has been more profitable than TUI. I can’t be sure this will continue, but businesses which generate higher returns can often recover more easily from difficult periods.

I’m also concerned that TUI’s business — which includes travel agencies, hotels, cruise ships and no fewer than five airlines — may be harder to manage through a period of restructuring. By contrast, easyJet’s seems quite simple.

Better than it seems?

Finally, I think that easyJet boss Johan Lundgren may be painting a gloomier picture than strictly necessary. By doing this, he’ll be able to push through tough cost-cutting measures that would be opposed to in more normal times.

easyJet has historically had higher costs than some rivals. This market crash gives Lundgren the chance to correct that and trim the firm’s operations to focus on the most valuable routes.

I think the easy profits are already priced into easyJet shares. But I believe that patient long-term investors should still see gains from easyJet at current levels.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to get access to our presentation, and learn how to get the name of this 'double agent'!

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.