Shares in the company have rallied as the outlook for the travel and tourism industry has steadily improved. At the same time, after several successive bailouts from the German government, the group’s balance sheet is now stronger than it was before the pandemic.
The German backstop also reassures investors that the company won’t collapse anytime soon. With this backstop in place and the company’s outlook improving, I’ve been reviewing the business recently to see if it could be worth adding the stock to my portfolio as a recovery play.
TUI share price outlook
The travel and tourism industry was bought to its knees by the global pandemic. Unfortunately, it could be years before the industry recovers. And it could take even longer to pay off its pandemic debts.
At this point, it’s almost impossible to tell how quickly the recovery will take, which companies will survive, and the returns investors will receive.
Still, it seems clear to me that the German government won’t let TUI fail. That implies it has brighter prospects than some of its peers in the travel sector. With a deep-pocketed backer on side, the group can focus on rebuilding rather than just staying afloat.
That said, the German government can’t convince holidaymakers to book trips. Nor can it persuade other countries to remove border restrictions. These are the two primary threats hanging over the firm and the TUI share price. If consumers can’t or don’t return, the company may never repeat former glories.
Based on all of the above, I think the TUI share price is a value trap. This is generally defined as a company that’s seen its ability to generate sales and profits permanently impaired.
I think TUI’s growth potential is permanently impaired because it has had to accept severe restrictions for its bailouts. It’s questionable whether or not it can compete effectively with other companies with these restrictions in place.
In addition, it may be the case that the global travel and tourism market has changed for good. With the threat of travel restrictions ever-present, consumers may decide to holiday closer to home from now on.
I’d avoid TUI for these reasons. However, there’s always going to be a chance the company may prove me wrong. Travel and tourism activity in the United States has recovered quickly, exceeding expectations. That could happen across Europe.
There’s also been a trend for holidaymakers to spend more on luxury packages with lockdown savings. If these trends emerge in Europe, TUI could benefit from a double tailwind of both higher customer demand and more spending. Unfortunately, there’s no guarantee this will happen.
Rupert Hargreaves 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.