Shares in TUI (LSE: TUI) have proved popular with bargain-hunting investors since the market crashed last year. The TUI share price has doubled since November’s vaccine news, but the stock is still under 400p, as I write. That’s well below the 560p level seen at the start of 2020.
Are TUI shares a bargain that could soar if European holidays return to normal this summer? I’m not so sure. As I’ll explain, I believe these shares are already much more expensive than they might seem.
Fundraising means lower share prices
TUI is in the process of raising €545m in a placing of new shares. This cash will help fund its operations until business returns to normal. We’ve seen a lot of placings over the last year, and I’ve no problem with this.
However, I think it’s important to remember the level of dilution this creates. TUI has issued 25 new shares for every 29 existing shares. This means the total number has increased from 590m to 1,099m — almost double.
Why does this matter? The firm’s future earnings will be divided among many more shares than in the past. So, it doesn’t make much sense to compare TUI’s share price today with the price before the placing.
My sums suggest TUI’s recent share price of 395p would have been equivalent to a price of about 710p before the placing. Its shares haven’t traded at over 700p since early 2019. This is one reason why I don’t think TUI looks cheap today.
Future profits: what can we expect?
TUI is in the middle of a massive restructuring operation. This is aimed at cutting the group’s cost base and putting in on track for a return to growth. Fair enough.
However, this company hasn’t been able to trade normally for almost a year. When coupled with big internal changes, that makes it hard to know what future profits might look like.
I’ve based my analysis on the assumption that the changes being pushed through by boss Fritz Joussen will be designed to return profits to 2019 levels, when the company reported a net profit of €416m.
TUI’s current share price gives the firm a market-cap of about £4.2bn (€4.7bn). By my calculations, this means the shares are already trading at about 11 times 2019 earnings.
A P/E of 11 seems high enough to me already. After all, this business wasn’t exactly an exciting growth stock before Covid-19.
TUI share price: better buys elsewhere
TUI shares look fully priced to me, even if trading returned to normal tomorrow. Sadly, that’s not going to happen. I think it’s fair to expect major disruption across Europe until at least June.
There’s also another problem I haven’t mentioned yet. Debt. To survive the coronavirus pandemic, TUI has taken on around €6bn of additional debt. This will all have to be repaid at some point.
I reckon it’ll take TUI another couple of years to recover. In the meantime, I think the share price is already high enough — possibly too high.
I won’t be buying this stock at current levels. In my view, there are much better buys elsewhere in the market.