The first quarter update released by the world’s largest travel group Tui (LSE: TUI) on Tuesday showed that it continues to offer significant upside potential. The company has experienced a number of significant changes in recent years and has had to cope with difficult trading conditions at times. However, it now seems to be in a position to deliver high total returns.
Strong performance
Tui was able to increase its turnover by 9% in the first quarter of the year. Its EBITA (earnings before interest, tax and amortisation) also improved, standing at a loss of €25m versus a loss of €60m in the same quarter of the previous year. This was due to the continued development of the company’s strategy, with its Sales & Marketing division performing well.
The business also benefitted from improving trading conditions. In prior years there had been a disappointing level of demand across the industry, with risks such as terrorism as well as economic uncertainty causing many consumers to seek other options. However, in recent months there has been a pick-up in demand, with this proving to be a positive catalyst on the company’s financial performance.
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Upbeat outlook
Looking ahead, Tui is forecast to grow its bottom line by 10% in the current year, followed by further growth of 12% next year. This suggests that there is scope for an improvement in investor sentiment – especially since the stock trades on a price-to-earnings growth (PEG) ratio of just 1. This indicates that there is still a discount to the company’s intrinsic value being priced in by the market following a period of subdued demand.
In addition to strong capital growth prospects, the company also has impressive income potential. Tui has a dividend yield of around 3.9% at the present time. With dividends due to rise by over 10% next year, the stock could generate high total returns in the medium term.
Sector peer
Of course, there are other travel and leisure stocks that could boost your portfolio performance. One prime example is Eastern Europe-focused budget airline Wizz Air (LSE: WIZZ). It has enjoyed rapid growth in recent years and has been able to expand its operations to include a variety of routes and destinations.
This is expected to lead to strong earnings growth over the next couple of years. For example, Wizz Air is forecast to post a rise in its bottom line of 24% in the current year, followed by growth of 19% next year and 20% the year after. Despite such a rapid rate of growth, the stock trades on a PEG ratio of just 0.6 at the present time.
Certainly, Wizz Air’s business model is highly cyclical. Demand for its services could decline in a short space of time. But with a wide margin of safety it appears to offer a favourable risk/reward ratio for the long term. As such, now could be the right time to buy it.
