The TUI AG (LSE: TUI) share price rose about 140% in the past year. It started on an upward movement since the successful vaccination drive began. Recently, the president of the European Commission announced that fully vaccinated Americans would be allowed to travel this summer. This is a big boost to travel stocks.
So, I would like to look further at the stock to see if it’s the right time to buy.
The bull case
It’s been at least a year since most people have been on a long holiday. I expect strong demand when the tourism sector fully opens. Companies like TUI will be the beneficiary of this trend. The vaccination drive in many countries is progressing in the right direction. The European Union had imposed a travel ban last year on most foreigners. The recent news allowing Americans who are fully vaccinated is a big positive since more US tourists visit the European Union than any other country outside the bloc.
The company is a leading player in the tourism sector. It operates various businesses including hotels, cruise liners, airlines, online portals and travel agencies. It caters to more than 20m customers. The integrated business model helps to offer its customers the whole value chain in the tourism sector. The company also benefits from cross-selling and promoting its various brands.
The company has a stable liquidity position at the moment. The successful vaccination in the UK, which is an important market for the company, is a big positive. The company has witnessed strong summer bookings. Average daily bookings were up 70% in January when compared to December.
The bear case for the TUI share price
The company was forced to be bailed out by the German government three times to survive the pandemic. This has increased the debt levels. If the company fails to repay the debt to the government, under the terms of the agreement, it could lead to significant dilution of ownership.
Even though the company will restart operations this year, it could take a couple of years for the company to reach pre-Covid-19 levels. This was also evident as the company did not provide any financial targets for the year 2021. At the moment, I feel there is a high level of uncertainty. If Covid-19 cases increase then this could lead to a sell off in the TUI shares.
The company had reported a huge loss of €3.1bn for the year 2020. In the most recent results, it had a loss of about €800m. There is no assurance that cash flows will improve this year. The downgrading of its debt by the credit agencies last year has also increased the cost of raising capital for the company.
Final view
The company’s operations pre-Covid-19 were good. Most countries opening tourism is positive for the company. However, I am not a buyer of the stock today. I am a bit worried about the high debts of the company. Also, there is uncertainty about the company’s revenue this year.
