The TUI (LSE: TUI) share price has been on a tear over the past few months. Shares in the travel company, which is one of the largest globally, have risen in value by 107% over the past six months. Over the past 12 months, the stock has jumped 66%.
It seems to me that investors have been buying into the business as part of the reopening trade. Over the past few months, shares in companies most affected by the pandemic have lept as the vaccine rollout has started to gather pace. Investors seem to be betting that the vaccine rollout will allow the world to return to normal shortly.
Unfortunately, this is far from guaranteed. The global vaccination programme is starting to gain traction, but the world seems to be a long way away from getting back to normal.
As such, I’m not in a rush to buy TUI right now. Despite the improving outlook for the economy, I think the company could encounter further near-term headwinds.
TUI share price outlook
The pandemic has impacted the global travel industry more than any other sector. Travel company revenues have plunged as borders have shut and airlines grounded.
Companies like TUI have raised considerable sums to fortify their balance sheets to try and survive the crisis. The German-headquartered group has been bailed out three times by the German government. And only last week, the business raised another €400m via a convertible bond to offset the impact of the coronavirus crisis.
All of these rescue attempts have left the company saddled with debt. I think it’ll be tough for management to get to grips with these giant obligations. It’ll take the group years to pay off its Covid crisis loans, and that’s assuming the travel industry recovers relatively quickly. Further setbacks could cause more pain for the TUI share price.
The bull case
On the other hand, the company’s performance could surprise to the upside. Initial indications show that while holidaymakers aren’t yet returning in numbers seen before the pandemic, those doing so are willing to spend more.
If this trend continues, the company could not only return to 2019 levels of profitability, but surpass them. That would allow it to start chipping away at its obligations. This could drive a virtuous cycle, whereby as the corporation reduces its debts, it has more money to invest in marketing, leading to higher sales, producing more money to reduce borrowing. If this happens, I think it could send the TUI share price soaring.
However, this is the most optimistic scenario. It assumes the world returns to normal pretty quickly. I think there’s a 50/50 chance of that happening.
As such, I wouldn’t buy TUI shares right now. I believe there are other companies with more attractive prospects in the current market environment.
