Will the TUI share price recover in 2021?

The TUI share price has doubled since vaccine news in November. Roland Head asks if the travel stock has further to fly — or risks being grounded.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head 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.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »