Is now a good time to buy shares in easyJet, Ryanair, and TUI?

Shares in Ryanair, easyJet, and TUI have fallen sharply in recent days. Is now a good time to buy?

| 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.

EasyJet (LSE:EZJ) shares have lost almost a third of their value in the last week, while Ryanair Holdings (LSE: RYA) and TUI Travel (LSE:TUI) shares are both down by just over a quarter. Does that mean these shares are now bargains?

If nothing else, recent stock market turmoil proves that markets are not rational.

The valuation of a company is meant to be a reflection of future dividends, discounted by a certain interest rate to give a net current value. If stock markets were rational, there would only be two possible explanations for a sharp rise or fall in valuations: either something important has occurred that will significantly change future dividends, or there has been a revision of expected long-run interest rates.

In my view, while the economic impact of the new coronavirus will be much greater than is commonly supposed, there should be no material impact on dividends paid out in future years. I would argue that the only rational justification for a sharp fall in share prices caused by the coronavirus is fear that the virus may cause the company to go bust.

Drill down

Ryanair’s total assets are worth 1.6 times liabilities, and for easyJet the ratio is marginally lower. For TUI, it is around 1.33.

In all three cases, current assets are worth less than current liabilities, which may make you feel concerned, but that is typical of the sector they operate in.

I suspect that there will indeed be corporate casualties caused by the coronavirus in the airline and holiday business. I think it is unlikely that eastJet or Ryanair will be among them. I expect future revenues and profits at the two companies will recover.

Looking at TUI, it is tempting to draw some kind of inference from the collapse of Thomas Cook, but while both companies faced similar headwinds, Thomas Cook had an extra challenge — large debts incurred to fund its purchase of My Travel.

If you felt the three companies were fairly valued before news of the virus hit, then, right now, they would all appear to be bargains.

The stronger case

There is another aspect not yet appreciated by the markets. If the coronavirus continues to spread and leads to some corporate collapses in the airline and holiday business, then those companies that survive should benefit, as they will be able to expand by filling the void created by bankrupt businesses. The rational thing, then, would be for the markets to push upwards on shares in airlines and travel companies unlikely to go bust.

Irrationality

Is now a good time to buy shares in easyJet, Ryanair, and TUI? If the markets suddenly went all rational, yes it would be. The economist John Maynard Keynes once said: “Markets can remain irrational longer than you can remain solvent.” I suspect that the markets will irrationally sell for longer yet, and I think that shares in these companies have further to fall before they eventually recover.

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.

Michael Baxter 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

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

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Down 78%, is this once-hot AI growth stock set to explode like the Rolls-Royce share price?

Our writer asks if he should invest in Super Micro Computer (NASDAQ:SMCI) following the growth stock's massive recent decline.

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »