Short-term movements

To begin with, it’s not just TUI shares that are performing well today. The International Consolidated Airlines share price is up 1.6% with easyJet shares up 1.2%. The sector in general is benefiting from a relief rally after having been on the receiving end of a tough couple of weeks.

This mirrors the broader FTSE 100 and FTSE 250 movements. Since the mini budget, the stock market has moved lower. Concern around the amount of debt needed to fund new tax cuts has led to some ditching stocks and moving to cash as a safe haven.

Another impact of this fear has been the fall in value of the British pound. This has been notable against peers including the euro and US dollar. This is a negative for TUI and the entire industry. If I’m thinking of booking a holiday in Europe but now my pounds are worth considerably less in value, I’m going to find the whole experience significantly more expensive. This would cause me to think about taking a domestic holiday instead, or at least hold off booking anything with TUI for the moment.

As a result, I don’t read too much into the short-term move higher in the share price today. Better investor sentiment might be seen for a couple of days, but it hasn’t changed my longer-term view.

Where I think the TUI share price goes next

At 115p, the share price isn’t too far away from the lows of last week at 101.5p. In turn, these were levels not seen for over a decade. This does make it difficult to analyse because we’re in uncharted territory. It’s not as though I can compare the company versus a couple of years ago when the share price was at a similar level.

The company has been loss-making for the past two years. Therefore, it’s hard to use traditional valuation metrics such as the price-to-earnings ratio so see if it’s undervalued. Clearly, a falling share price should make the valuation more appealing. But unless the finances start to improve, there’s no reason why the value of the business shouldn’t fall further.

In positive news, the business raised significant new capital last year. This should help to prevent any bankruptcy chatter. Further, in the latest trading update from September, the Markets and Airlines division was expected to deliver a profitable quarter, despite the broader summer disruption.

Ultimately, I don’t see any major reason why the stock is set to break out of the downward spiral. Based on the lack of positive conviction, I don’t see value in me buying simply because of the low share price. I think the stock could face further pressure in coming months.

Problems over the past year

The business has been hit in several ways in the past 12 months. The hangover from Covid-19 was still apparent until fairly recently, with self-isolation requirements and travel restrictions limiting the ability to travel abroad.

Even with most of that being lifted earlier this year, other problems have beset the travel and tourism sector. Core commodity price increases due to the war in Ukraine have caused jet fuel to be very expensive. This reduces profit margins on flights.

We’ve also seen a rapid inflation increase, causing many to rethink a package holiday in Europe in favour of a local UK-based trip that’s cheaper.

TUI specifically has also struggled with cash flow and management of finances. This means it needed to raise additional capital in January and October of last year. These weren’t small amounts either, the raise in October was to the tune of €1.1bn!

All of the above reasons have been contributing factors that have dragged the share price lower over this period.

Future implications for the TUI share price

The shares are down 69% over the past three years and revenue has fallen 75% over the same period.

With this correlation being strong, it’s logical to think that if the business can grow revenue in the coming year and beyond, the price should lift as well. The latest quarterly results last month did offer some green shoots. Revenue was €4.4bn, up significantly from the €649m in the same quarter last year.

The hotels and resorts arm was profitable, as was the broader holiday experiences division. The biggest loss-making area continued to be the airline. This indicates to me that if flight capacity continues to improve, group finances as a whole will benefit.

My concern is that even with growth at the top level, overall profitability is still non-existent. TUI lost €331m in the last quarter, and it can only run on debt and raising new capital for so long. I think it’s going to take a while before the business is back to health.

Were I forced to invest in the travel and tourism sector, I’d consider investing in TUI. However, I’m not restricted in this regard. So I think there are much more exciting sectors at the moment that have more growth potential with lower risk. On that basis, I’m going to save my money and invest it elsewhere.

Clearer skies ahead?

TUI (LSE:TUI) was decimated by the pandemic. I’m hardly surprised that its share price has plummeted 55.5% in the past year. Currently trading at 164p, the firm has incurred heavy losses over the past two years.

The travel company sank to a €3.2bn pre-tax loss for the year ended September 2020. 

Fast-forward one year, to September 2021, and pre-tax losses had narrowed slightly to €2.4bn. While this gave me confidence that a potential recovery was in progress, this is still a significant loss.

This was caused, of course, by a lack of international travel. When the pandemic struck, almost every country closed its borders and introduced tight entry restrictions. This severely limited TUI’s ability to operate.

Recently, however, the business has stated that summer bookings for 2022 are running at about 85% of 2019 levels, while losses halved for the six months to 31 March. Over those same six months, revenue jumped to €2.1bn, from €248m for the same period in 2021.

There are still challenges ahead, like staff shortages, but if TUI can get back to full working order, I think the share price could move markedly higher in the coming months.

Are we through the choppy waters?

Like TUI, Carnival (LSE:CCL) has suffered over the past two years. The shares have fallen 61% in the past year to currently trade at 725p.

As a brief reminder, Carnival is an operator of cruises. While the company had around $6.4bn in cash at the end of February, it also had spiralling debt and costs. 

To cope with the rough seas of the pandemic, it took on significantly more debt. This now totals somewhere in the region of $20bn.

However, passenger ticket revenue for the three months to 28 February was $873m, up from just $3m during the same period in 2021. Furthermore, total revenue (including onboard sales) amounted to $1.6bn, up from $26m year on year.

Despite this, with more voyages come more costs. The business is also not immune from the challenges of inflation and surging energy prices. These could eat into future balance sheets, given the broader economic environment at the current time. 

While a recovery may be on the cards here, the debt issues and increased costs could make it slower than expected.

Overall, these two firms have endured a torrid time recently. While there are risks attached to buying shares in either firm, I will split my £2,000 equally and purchase shares in both in advance of a potential travel recovery.  

The stock catching my eye is hotel chain InterContinental Hotels Group (LSE:IHG). Investing in any travel-related company carries risk. Increasing restrictions to travel arising from either the pandemic or the ongoing conflict in Ukraine could negatively impact travel stocks across the board. But here’s why I think that InterContinental is the best way for me to cash in on the return to international travel as an investor.

Business model

InterContinental has an asset-light business model. Instead of owning the buildings that its hotels are in, the company uses a franchise model. Independent operators pay InterContinental a fee to use its branding and become part of its network.

This gives InterContinental very good control over its costs. During the pandemic, this was particularly important. Where companies such as TUI and IAG had to pay costs to maintain their aircraft and staff, InterContinental was able to leave this to its franchisees.

The benefit of this manifests itself in InterContinental’s financial statements. InterContinental makes more money than TUI or IAG while having lower fixed costs. Moreover, while total debt at TUI and IAG has increased by around 300% since 2018, InterContintental’s debt is only up around 50%.

Switching costs

In my view, InterContinental has another big advantage over its FTSE 100 rivals. Unlike TUI and IAG, InterContinental’s business benefits from high switching costs.

Switching costs at TUI and IAG are low. If I book a holiday with IAG, for example, this doesn’t automatically give me an incentive to do it again. It’s easy for me to shop around for my next holiday and find the best deal, even if that’s somewhere else.

With InterContinental, though, things are different. Its network of franchisees are typically tied into contracts that last between 20 and 30 years, making it expensive for them to leave.

Furthermore, switching to a different chain is costly for the hotel operator. Moving away from InterContinental to a competitor involves renovating and rebranding, which is expensive. As a result, franchisees have an incentive to stay with them in a way that TUI and IAG customers do not.

Conclusion

Overall, I think that InterContinental Hotels is a much more attractive way to take advantage of the surge in holiday bookings than either TUI or IAG. In my view, the company has a stronger business model and a better balance sheet than its FTSE 100 rivals. I’m keeping the stock firmly on my watchlist for now and I’ll be looking to take advantage of any weakness in the share price as a chance to start an investment.

• For the final three months of 2021, revenue increased to €2.4bn from €500m in the same period in 2020
• 2.2m passengers flew on TUI aircraft for the three months to 31 December 2021, an increase from 600,000 a year previously
• More and more countries are dropping all pandemic-related entry requirements 

Covid-19 meant that the travel industry virtually ground to a halt. Every firm in this industry felt the full force of the pandemic and TUI (LSE:TUI) was no exception. The company operates flights, hotels, and cruises. Shares are currently trading at 228.30p, down 33.7% in the past year. With improving financial results and higher occupancy rates, is the firm over the worst of Covid-19? Here’s why I’m buying shares in this business at the current TUI share price. Let’s take a closer look.  

Recent results and the TUI share price

Covid-19 had a devastating impact on the business. For the year ended 30 September, the company reported a loss of €3.2bn in 2020. This figure narrowed to €2.4bn in 2021.

More recent results indicate that the firm is now heading in the right direction.

In a report for the three months to 31 December 2021, the company reported revenue of €2.4bn. This was a major improvement, year on year, when revenue stood at just €500m.

In addition, the loss for the period was €386.5m. This was more than half the figure for the same period in 2020, €790.3m. It should be noted, however, that past performance is not necessarily indicative of future performance.

Improving passenger numbers and occupancy rates

For the three months to 31 December 2021, figures also increased in all segments of the company. Regarding air travel, TUI reported that it flew 2.2m passengers during this period, a load factor of 79%, compared with just 600,000 year on year.

Furthermore, after an almost non-existent 2020, cruises once again began to generate cash. During the same period, revenue from the cruise segment grew to €34.2m. This is a significant increase from the 2020 period figure, €600,000.  

The same trend is visible in TUI’s hotel segment. For the final three months of 2020, hotel capacity was around 5.1m. For the same period in 2021, this had risen to 8.6m. What’s more, the actual occupancy rate for the 2021 period was 64%, compared with 43% in 2020.

This tells me that more hotels are open for business and more holidaymakers are staying in them. This can only be good news for the TUI share price. It should be noted, however, that any future Covid-19 variant could result in operations grinding to a halt. This could prove disastrous for the company.

Despite this, however, international travel does seem to be making a serious comeback. Countries like Norway and Mexico are among a number that have dropped all pandemic-related entry requirements. If this trend continues, and I think it could, the travel industry will be in a much more secure position generally.

Given the improving conditions and better results, I think TUI really is a ‘no-brainer’ buy today for my portfolio. I will be purchasing shares in this giant of the travel sector today. 

• A number of companies with links to Russia and Ukraine fell as much as 33.9% in a single day
• Beazley is a strong insurance firm, with very solid results
• The TUI share price is still low and the business will benefit from relaxed pandemic restrictions

Towards the end of last week, the stock market declined dramatically. Indeed, the FTSE 100 index fell 4% in a single day. This was primarily caused by the Russian invasion of Ukraine. While most firms fell to some degree, some companies with Russian or Ukrainian exposure saw their share prices plummeting. Evraz, the iron ore miner controlled by Russian businessman Roman Abramovich, fell 29.5%. Furthermore, the gold company Polymetal dropped 33.9%. Wizz Air, an airline based in Hungary, crashed 11.3%. Due to their locations, all three of these firms were directly impacted by the military action. The next day, however, they were up 19.5%, 17%, and 12% respectively. That’s why I’m writing about a stock market correction, not a stock market crash. During this dip, I think I’ve found two strong companies to purchase for the long term as market volatility continues. Let’s take a closer look.

An insurance firm for a stock market correction

The first business, Beazley (LSE: BEZ), is a non-life insurance company operating across the globe. Its share price fell 6% last Thursday, to 448p, and rebounded 3.9% the following day. At the time of writing, it’s trading at 454p and is still below where it was this time last week, despite being up 28% year-on-year. Between calendar years 2017 and 2021, its earnings-per-share (EPS) increased from ¢25 ¢50.9. By my calculations, this means that the firm has a compound annual EPS growth rate of 15.3%. This is very strong and consistent.

Furthermore, revenue increased over the same period from $2.3bn to $4.6bn. Needless to say, things are going in the right direction. Investment firm ShoreCap also recently stated that Beazley was “well capitalised”. This is attractive, given the current stock market correction. On the other hand, its forward price-to-earnings (P/E) ratio is slightly higher than major rival, Axis Capital. This may indicate that the company is not necessarily cheap.

A FTSE 250 travel firm

The second company, TUI (LSE: TUI), is a travel business operating flights, hotels, and cruises. It fell 4% during the initial sell-off, to 237p, gaining 6% the next day. At the time of writing, it’s again trading at 237p, down 22% in a year.

In a trading update for the three months to 31 December 2021, the company announced that revenue had risen to €2.4bn. This was an increase from just €0.5bn for the same period in 2020. Furthermore, its losses narrowed from €675.8m to just €273.6m over the same period. These improving figures are exactly what I want to see when responding to a stock market correction. It’s worth noting, however, that progress may be impacted if another Covid variant emerges.

It may also be cheap when compared with easyJet. TUI has a forward P/E ratio of just 21.19, while easyJet’s is 142.86. Although the share price is low on account of the recent market volatility, I’m pleased that the company may also be undervalued. 

The stock market correction has caused panic, but I’m staying calm and sticking to my principle of buying quality growth stocks at bargain prices. I will be purchasing both Beazley and TUI today for my long-term portfolio. 

Operations

The cause of TUI’s financial problems can be found in its income statement. The company’s costs have declined more slowly than its revenues since the beginning of the pandemic. This is because TUI has still had to maintain its aircraft, buildings, and cruise ships, as well as pay staff to do so. These are TUI’s major costs and they apply whether or not the company is collecting revenue from passengers.

As a result, a 66% decline in revenues has moved TUI from making an operating profit of £576m to losing just under £1.5bn. Looking forward, I expect this to reverse. As TUI’s operations resume, I think that its profits will rise faster than its revenues. The trouble is, I also think that the costs the company has incurred will cause a lasting problem for TUI as an investment.

Debt

As an investor, I’m looking for companies that can return cash to me within a reasonable timeframe. TUI’s current financial situation—and specifically, its debt levels—give me reason to doubt that it will be able to do this. This makes me think that TUI shares are not an investment opportunity for me.

The biggest concern that I have is that TUI has to use a lot of the money it makes paying interest on its debt. At the moment, TUI pays around £390m annually in interest. Obviously, TUI made a loss last year, which is entirely understandable. But I’m not sure that the situation improves enough even if TUI’s earnings recover to their 2018 (pre-pandemic) levels.

In 2018, TUI made an operating profit of around £576m. Even if the business recovers to that level, the company’s interest payments would still amount to around 67% of its operating income. And that is just the interest on TUI’s debt—it doesn’t include the company paying down the debt itself, which has increased by 168% since 2018.

The situation is made worse by the rising interest rate environment. In order to combat inflation, the Bank of England has raised interest rates twice since December. For a company like TUI, this makes the possibility of dealing with their debt by refinancing it less attractive. As someone thinking about investing in TUI shares, I think that this means that the company will have to pay its debt down sooner, which will further inhibit its ability to return cash to shareholders.

Conclusion

In my view, there is reason to think that TUI’s business will bounce back well as the restrictions associated with the pandemic end. In the meantime, the company’s share price might continue to increase. From an investment perspective, however, I think that the company’s financial situation is such that it will be a long time before it is in a position to provide an acceptable return. I also believe that there are other UK companies that provide more attractive opportunities. As a result, I’m avoiding TUI shares at all costs.

• The travel firm TUI may see its share price rise from the reopening of international borders
• BHP Group mines copper, a precious metal used in the development of electric vehicles
• Both companies could be a great place for me to invest £1,000

With £1,000 to invest in the stock market, I’m on the lookout for the best shares to buy now. Having scoured the indexes, I think I’ve found two great companies. The first, TUI (LSE: TUI), is a travel firm that may well benefit from the global reopening after the Covid-19 pandemic. Secondly, BHP Group (LSE: BHP) is a business that mines a number of commodities, like iron ore and copper. These commodities can have many uses in a number of industries. What justifies investment in these companies? Let’s take a closer look. 

Are travel companies the best shares to buy now?

For the three months to 31 December 2021, TUI reported positive results. Revenue was €2.4bn, compared to a mere €0.5bn for the same period in 2020. Furthermore, the number of passengers increased by 1.7m to 2.3m, with a load factor of 79%. This tells me that more aircraft are flying more passengers.

With a strong liquidity position of €3.3bn, the firm may also benefit from the reopening of borders. Just this month, Norway removed all its pandemic-related restrictions. Switzerland and Sweden have made similar moves. I think this could have a domino-effect, as more and more countries completely reopen.

This progress could be halted, however, if other variants arise in the near future. Nonetheless, the comeback of the tourism industry makes TUI one of the best shares for me to buy now.

Metals for the future 

The second company, BHP, mines a number of metals and coal. Indeed, iron ore and copper account for 80% of the company’s sales. In recent results for the six months to 31 December 2021, the firm reported a profit of $18.5bn. This is a 33% increase from the same period in 2020. 

Furthermore, the results showed a 27% gain in revenue to $30.5bn. While these figures are very encouraging, the iron ore price has suffered. This is chiefly because of policy changes in China that have reduced the need for the commodity.

Nonetheless, copper is essential for efforts to decarbonise. Specifically, this precious metal is a critical component of electric vehicles (EVs). In this sense, the business may well benefit from moves to create a greener world, potentially making it one of the best shares to buy now.

Both of these companies may experience an uptick in the near future. The world is reopening and this can only be a good thing for travel companies. With its strong liquidity position, I think TUI is a good investment at current levels. Furthermore, BHP’s exposure to important precious metals could be very positive indeed. I will be splitting my £1,000 evenly and buying shares in both of these stocks.

Wizz Air

Wizz Air (LSE: WIZZ) arguably has the strongest balance sheet of the publicly traded airline stocks. Its half-year report for the six months up to 30 September also contained good news. Wizz Air stated that its passengers carried figure was up 92.7% from the previous year. This is a strong signal that demand for flights was increasing again and that people were generally travelling a lot more. Revenue also grew by almost 87% and losses were narrower.

While Wizz Air was already operating from a relatively strong cash position, those recent results indicate that this stock has rebounded well. It’s also expanding, recently acquiring Norwegian Air’s slots at London’s Gatwick Airport. The Omicron variant led to a 16.5% fall in Wizz Air’s share price in December 2021, however, demonstrating that the Covid pandemic is an ever-present danger to travel stocks. This compares with a 5% increase in share price for the whole of 2021. Citigroup analysts also recently downgraded Wizz Air and expressed a preference for long-haul carriers. Airlines operating on a long-haul basis, Citi said, are already benefiting from the opening of transatlantic routes and uninterrupted cargo operations.  

TUI

Travel firms have faced cash crunches during the pandemic but holidays giant TUI (LSE:TUI) issued convertible bonds in April 2021. This raised €400m to bolster the balance sheet and preceded a €1.1bn capital raise in November 2021. That came after revenue nearly collapsed over the past two years. In 2019, revenue was nearly €19bn. The full-year results up to 30 September 2021 revealed revenue was only €4.7bn.  

Nevertheless, increased European travel resulted in 66% hotel occupancy and 14 out of 16 cruise ships in operation. The underlying loss for the firm’s cruise segment in Q4 2021 was €43m, narrowing significantly from €125m for the same period in 2020. I believe this means TUI is starting to recover. It also reported 4.1m bookings for Winter 2021/22 and Summer 2022, indicating greater consumer confidence in travel. Similar to Wizz Air, TUI’s share price is down 11.2% for the past three months. 

I have reasons to be optimistic about both of these stocks going into 2022. They’ve performed well since markets resumed trading this month. Given the ongoing threat from new Covid variants, however, operations may stall if new measures are introduced by governments and share prices will fall in turn. Nonetheless, I feel that these two stocks should have a much stronger 2022 if the pandemic eases. While I’m not buying any of these shares at the moment, because I want to see more evidence of a short-haul recover yin the near term. I may well add them to my portfolio at a future time.

It looks as if investors have been buying back into the business on news the Omicron coronavirus variant is not as severe as initially thought. This could suggest the global travel market is set to reopen over the next few months. And that would be a positive development for the TUI share price. 

However, as we have learned over the past two years, nothing is guaranteed when it comes to the pandemic. As such, I think three potential scenarios could influence the company’s outlook in the year ahead. 

TUI share price outlook

The global travel market will reopen in 2022, and most restrictions will disappear in the best-case scenario. There are already indications consumers are willing to spend more on holidays after two years of disruption. This could generate a double tailwind for the company via a combination of rising sales and higher levels of spending generally. 

In the base-case scenario, and the one that I think is most likely for the year ahead, travel disruption will continue, although the market will start to recover. A certain level of uncertainty may persist throughout the year, which could hold back consumer spending. However, in this scenario, I think the TUI share price will be able to put the worst of the pandemic behind it. 

In the worst-case scenario, the world will return to the strict lockdowns seen at the beginning of the pandemic. I think this is unlikely, but I am not going to overlook the risks. In this scenario, the company may have to seek another bailout. Such a development could send the TUI share price plunging to new lows. 

Buy, sell, or hold?

Considering all of the above, I am cautiously optimistic about the outlook for the stock in 2022. That said, I am in no rush to buy the equity right now. TUI has quite an uncertain future. And after two years of pandemic disruption it has a fragile balance sheet. 

It has also been bailed out three times by the German government, and each bailout came with new restrictions. It could be years before the company is able to repay its obligations and move on from the  pandemic’s disruption. 

Still, if the company does return to growth in 2022, I think the stock can continue to move higher as the market reevaluates the enterprise as a recovery play. While this happens, I am happy to sit on the sideline and wait for further concrete evidence of the group’s return to growth. There is no telling what could be just around the corner for the business.