Warren Buffett is one of the most respected investors on the planet, and has been for several decades. At 90 years of age, his illustrious investing career is almost legendary. Over the decades, he’s provided countless pieces of advice on the subject that I try to take on board when thinking about a particular stock. With recent volatility, the TUI (LSE:TUI) share price is on my mind, as a stock I’m looking at right now. So what would Buffett do in my position?
High liabilities
Buffett famously is not a fan of debt in any form. He was quoted as saying: “I do not like debt, and do not like to invest in companies that have too much debt.” I agree with him, as debt can end up being a hindrance to a company, especially if short-term assets can’t offset the liabilities.
One of the reasons the TUI share price has moved lower over the past year is due to large debt levels. I get that the pandemic meant the business needed to raise money to stay afloat. But in my opinion this got out of hand with TUI. At the end of Q3, net debt stood at €4.6bn. When you group together all current liabilities and compare then to current assets, the picture doesn’t look great. Comparing the proportion between the two is known as the current ratio. TUI has a current ratio of 0.45. This means that it has 45p of assets for each £1 of liabilities in the next 12 months.
So with high debt levels, and high liabilities in general, I don’t think Buffett would be keen on investing in TUI from that angle.
Is the TUI share price just in temporary trouble?
Another quote from Warren Buffett is that “the best thing that happens to us is when a great company gets into temporary trouble…we want to buy them when they’re on the operating table.” What he’s getting at here is the ability to buy into a company when it’s oversold in the short term. The blip can allow a smart investor to see past the temporary issue and look to the long-term prospects.
The Covid pandemic is a temporary problem. As much as it’s a devastating and terrible virus, at some point countries will recover and we’ll be able to go back to some kind of normality. The pandemic is the main reason why TUI (and the share price) is in so much trouble. Of course, TUI had issues before the virus kicked in. But at the same time, it’s the largest travel and tourism firm in the world. So I’d back it to survive the pandemic right now.
As a result, I could look at the TUI share price trading around 400p and think this is a great buy. Given where it traded at in 2018 and 2019, Warren Buffett may see value in buying during this temporary trouble.
He has invested in the travel and tourism industry in the past, and so might view TUI as a buy. But I’m not convinced he’d be won over and I’d prefer to wait on the sidelines to see how the next few months pan out.
