The company’s huge debt pile means avoiding TUI (LSE:TUI) shares has been a no-brainer for me. With the stock being one of the worst performers in the FTSE 250 since 2018, that’s worked out well.
Recently though, things have started to change. The company’s balance sheet is improving and travel demand is returning to pre-pandemic levels – so are TUI shares worth another look?
A 200% return?
Five years ago, TUI had a share price of £18.47. If the stock gets back to that level, then an investor buying its shares today would see a gain of almost 200%.
I think this looks unlikely. To stay afloat during the pandemic, the business took on huge debts and repaying those has dramatically increased its share count.
Back in 2018, TUI generated £649m in net income. With 1.1bn shares, that resulted in 58p in earnings per share (EPS).
Today however, the company’s share count is much higher. By my calculations, the latest rights issue looks set to take the number of TUI shares up to 2.15bn.
Making 58p in earnings per share with that many shares requires net income of £1.25bn. But this doesn’t look plausible to me – the most the business has made in the last decade is £886m.
Are TUI shares a bargain?
If a 200% return looks unlikely, then what would a more realistic expectation be for an investor like me?
Suppose TUI is about to get back to its previous profit levels – demand is currently strong, after all. With 2.15bn shares, £886m profit means 41p per share.
At today’s prices, this implies a price-to-earnings (P/E) ratio of 16. That’s not the highest on the stock market, but it isn’t an obvious bargain either.
I think this means TUI’s shares could go up if earnings come in higher than expected. But I wouldn’t count on this happening.
Others disagree though – the stock jumped 12% on Thursday. But I don’t think the underlying business has the earnings power to provide a return at today’s prices.
Outlook
To me, it looks as though TUI has replaced one problem with another. Instead of a balance sheet issue, it now has a profitability issue.
Arguably, this is better for the company. A high share count might weigh on earnings per share, but it doesn’t threaten to bankrupt the business the way that excess debt might.
But this isn’t much good to investors looking to buy TUI stock. It means that the company’s shares are likely to be worth less than they were before and this is what ought to matter to shareholders.
That’s why I’m not looking to add TUI shares to my watchlist right now. Even with an improved balance sheet and demand looking strong, I think I can do better elsewhere.
This post was originally published on Motley Fool
