Are you an investor looking for a tempting recovery buy in the 2020 stock market crash? I challenge you to look at the TUI (LSE: TUI) chart and tell me you’re not at least intrigued. The TUI share price has lost two thirds of its value since the Covid-19 pandemic struck. And unlike many other early fallers, TUI hasn’t managed any real comeback yet.
I expect the failure of Thomas Cook has turned hordes of investors away from holiday firms. And with the tough times now facing International Consolidated Airlines, easyJet, Ryanair and the rest of the world’s airlines, I’m sure many won’t ever go near travel and leisure firms again. That’s especially so after having been burned by the TUI share price this year.
I often argue that airlines are way too risky. They have no control whatsoever over so many things that affect their business. Admittedly, I didn’t have a devastating global pandemic in mind. I was thinking mainly of fuel prices, and the almost total absence of any real differentiation among the carriers.
But general holiday firms aren’t quite so specialised. So what of the prospects for the TUI share price now? The company has just reported a €1.5bn loss for the three months to 30 June. And it says it says it doesn’t expect trading to return to normal until 2022. Revenue collapsed by 98%, but that needs to be seen in context. The pandemic lockdown brought TUI’s business to a halt, but the firm did remind us that “partial operations successfully resumed from mid-May.” And there is an upside.
TUI has agreed a stabilisation package with the German government worth €1.2bn, to help keep it going until the end of 2021. I’m always wary of companies carrying debt, especially in hard times when we’re looking at recovery prospects. But surely, this rescue deal will keep the company from collapsing under its debt and give the TUI share price a year or so to recover?
Well, without the deal, I think TUI shares would have been heading for zero. But does the financial rescue mean TUI is out of the woods? No, it most definitely doesn’t. On 31 March, TUI had total net debt of a massive €4,902m on its books. That compares to only €1,964m a year previously.
After the German government assistance, I think TUI looks like it will survive long enough for business to get back to normal. But the package has added even more debt to the mountain. And it will have survived long enough to merely start getting itself out of an enormous debt hole.
TUI share price tempting?
TUI says it is already receiving high volumes of bookings for next year, with bookings for Summer 2021 up around 145%. So the business is still there. And those companies surviving the crunch while others have failed will face less competition.
But however you look at it, I will not buy shares in a company whose net debt way outstrips its market capitalisation. I don’t care how low the TUI share price goes, I’m not buying.
Alan Oscroft 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.