TUI and easyJet share prices are taking off. Here’s what I would do about it

With TUI and easyJet share prices already on the climb, Dylan Hood takes a deeper look if now is the right time to invest in these stocks.

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The Covid-19 pandemic has sent shockwaves through the travel industry, closing borders, cancelling holidays, and reducing flights. Throughout the first 10 months of 2020, the tourism industry suffered losses of $935bn worldwide. As a result of this, TUI (LSE:TUI) and easyJet (LSE:EZJ) share prices plummeted throughout 2020, but with Boris Johnson’s recent roadmap plan back to normality signalling travel could be open for summer, both stocks have seen a surge. So where do I see TUI and easyJet share prices going in the future?

TUI’s rising share price vs struggling business

Throughout 2021 TUI has seen a massive recovery, with its share price rising 48% in the last three months. However, this figure is deceiving when considering some of TUI’s business fundamentals.

At the end of 2019, TUI boasted a market cap of £5.4bn, which has since shrunk to £2bn, largely due to a third bailout from the German government to keep the company afloat. This largely added to company debt, which didn’t help an already struggling balance sheet. Part of this deal also included placing restrictions, such as a dividend ban, making the company less appealing to investors.

However, CEO Friedrich Joussen quoted in the 2020 Annual Report that he believes the “holiday sector remains on its long-term growth pathway”, showing future confidence, perhaps due to the 2.8m holidays TUI still has booked for this year’s summer. Regardless, in its first quarterly report of 2021 TUI has shown a group revenue of only £414m, down 88% from last year, with analysts indicating the company won’t operate at full capacity until 2022/23.

A similar story for easyJet?

The easyJet share price has followed a similar trajectory, crashing in 2020 whilst recently spiking 30% since the government announcement. However, there are a few reasons why I prefer this stock to TUI for my portfolio. Whilst TUI’s loan came with restrictions such as dividend suspensions, easyJet’s £1.4bn package is actually expected to strengthen its balance sheet, through extending its debt maturity profile and increasing liquidity levels. The company believes it will “emerge from the pandemic more efficient” as a result of this.

It’s still hard to ignore the 88% drop in revenue from 2021’s first financial quarter. However, to combat this easyJet has confirmed that it has reduced costs by 52% excluding fuel, with material savings across much of the business running in line with its structural cost-out programme announced last year. What’s more, research conducted by easyJet shows that nearly 75% of previous customers are planning to travel this year.

The verdict

Whilst both companies have seen a recent surge in share price, I am still unconvinced on whether their stock will continue to offer significant returns until a lot further down the line.

TUI is facing some serious balance sheet issues due to consistent government bailouts, leaving a cloud of uncertainty above its share price. The vaccine rollout may help TUI’s stock in the short term, but I am less convinced it will offer more significant returns throughout this year.

As for easyJet’s share price, the streamlining and strengthening of its balance sheet is certainly a good indication of what I believe will be a more prosperous future. As a current investor myself, I will be holding for the long run.

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.

Dylan Hood has shares in easyJet. 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.

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