TUI [LON:TUI], the German leisure, travel and tourism company’s, recent share price performance has been hugely disappointing. The FTSE 250-listed company’s market value has declined by 50%, and underperformed the index by 37%, over the past year as investors have become increasingly downbeat about its near-term prospects.
Risks such as deteriorating consumer confidence, which recently reached an all-time low in the UK, and an impending cost-of-living crisis have prompted weaker investor sentiment towards the firm. In addition, logistical difficulties that have caused flight cancellations and the announcement of a new CEO have been partly responsible for the stock’s plummeting market value over recent months.
Overcoming short-term threats
Of course, it is difficult to contest that TUI faces tough operating conditions that could have a negative impact on its near-term financial performance. However, it has the financial means to overcome them to benefit from a likely long-term sector recovery.
For example, it had a liquidity position of EUR 3.8bn as of May 2022. Meanwhile, net debt declined by 22% between the first and second quarters of the current year as the company experienced positive cash flow in a more normalised operating environment. This shows it has the financial capacity to ride out potentially tough trading conditions.
It is also successfully implementing an ambitious cost reduction programme that commenced in 2020. So far, it has generated 60% of the EUR 400m in permanent annual cost savings that were sought. A further 20% is expected to be achieved this year, with the remainder on track to be delivered in 2023. Improved efficiency may give the firm a competitive advantage that strengthens its market position.
TUI’s long-term growth potential
Clearly, the prospects for travel firms were widely expected to materially improve in 2022. The relaxation of Covid-19 travel restrictions, coupled with pent-up demand for holidays, was forecast to produce buoyant operating conditions across the sector.
Although worsening consumer confidence and a cost-of-living crisis could weigh on demand, TUI’s recent share price performance may not reflect the industry’s long-term prospects. Indeed, demand for travel is very likely to rise over the coming years as the economy’s outlook and pandemic-related challenges abate. And with holidays likely to be more akin to a staple item, rather than discretionary spend, for many consumers, the firm’s financial outlook may be more robust than its recent share price performance suggests.
Indeed, TUI’s latest half-year financial results showed a significant boost in demand for its products and services. For example, it operated 71% of its 2019 capacity in the second quarter of its current financial year. This was a four percentage point improvement on the first-quarter figure. It is likely to further rise as logistical challenges ease and Covid-19 becomes endemic.
Investment potential
Undoubtedly, TUI faces an uncertain near-term outlook that is likely to lead to continued share price volatility. However, investors appear to have adequately factored in threats such as a cost-of-living crisis and weak consumer demand. The firm’s shares trade on a forward price-to-earnings ratio of just 6.5, which indicates they offer a wide margin of safety. Therefore, based on their long-term growth potential, they offer investment appeal.
