The TUI (LSE: TUI) share price has fallen by more than 20% in a month, as fears grow that Covid-19 travel restrictions will last through the summer.
However, TUI shares are still up 55% on over the last year. Investors who bought the stock as markets crashed last March have done well. Conventional market wisdom says investors should run their winners, but is TUI still cheap enough for me to buy? I’m not so sure.
Why I like TUI
TUI’s share price is still 40% below January 2020 levels. For that money I can get exposure to Europe’s largest travel company. TUI operates in all of Europe’s most popular holiday markets, so I think it should benefit immediately when demand starts to return.
History suggests to me that sunseekers in Northern European countries such as the UK and Germany will get tired of staycationing. They’ll want to get back to places where the sun’s a bit more reliable.
I’m confident that holiday demand will return to normal after the pandemic. In February, TUI said it was planning to operate at 80% of 2019 capacity this summer. I think that might be a little optimistic, but I’m sure we’ll see holiday activity return to normal in 2022.
This is what worries me
I can see two main problems with buying TUI shares as a Covid-19 recovery play. The first is that TUI’s sprawling empire of hotels, airlines and cruise ships means its operating expenses are quite high. In 2019, the company’s reported revenue of €18,900m, but its operating profit was just €769m. That’s an operating profit margin of only 4%.
If TUI’s assets are open but less busy than usual, then profit margins could be even lower, despite cutting costs.
My second worry is debt. TUI has borrowed a lot of extra money to get through the pandemic. The group’s net debt rose from €5.1bn at the end of 2019 to €7.2bn at the end of 2020.
Over the same time, TUI’s share price drop means that its market-cap — the value of all its shares — has fallen from around €5.8bn to €3.9bn.
One common way to value a business is to add together its net debt and market-cap. This is known as enterprise value. It shows the total cost of the company for a potential buyer. My sums tell me that TUI’s enterprise value is almost the same today as it was at the end of 2019.
TUI share price: I’m staying away
In my opinion, the risks facing TUI’s business today are bigger than they were at the end of 2019. To invest, I’d want to have a margin of safety in case of further problems.
I don’t think TUI’s share price is low enough to provide that kind of protection. With travel restrictions likely to stay in place across Europe for some time yet, I reckon TUI looks fully-priced.
I’ll take another look later this year but, for now, I’m staying away.