Bouncing off the bottom: Can TUI pay off its debts and soar?
Hotels, ships and excursions earned TUI 1,283 million euros in the last completed year, tour operators with their own planes 200 million - and in the just-ended quarter, a loss. The stock trades at roughly five and a half times earnings and nobody cares. The answer to why lies not in the numbers for the last quarter, but in what holds the two halves of the company together.
Key points
Operating profit came in 41 million euros below the average analyst estimate, and the stock closed the day just one percent lower.
The hotels, ships and excursions division earned 1,283 million euros last year, tour operators with planes 200 million.
For this year's outlook to hold at all, the last quarter must bring at least 977 million euros in operating profit.
At today's price, the market pays exactly five times the operating profit of the hotels, ships and excursions.
Bookings over the last four weeks are 7% above last year, although summer as a whole is lagging by six percent.
On Wednesday morning, 12 August, the numbers of German travel group TUI $TUI1.DE looked exactly like what the market had feared. Revenue for the third quarter of fiscal year was 5.82 billion euros, 6.1% less than last year. Operating profit was 233.8 million euros against 320.6 million a year earlier. The market expected revenue around six billion and operating profit around 275 million. Both missed, the latter significantly.
The stock reacted with a drop, at one point down 3.7 percent. By the end of the day, however, most of the loss was erased and it closed at 7.28 euros, 1.1 percent below Tuesday's close. Since the start of the year it is roughly 18 percent in the red and about 24 percent below the February high of 9.56 euros.
That is worth noting. Operating profit missed the estimate by fifteen percent and the stock slipped by one. The market either had the bad quarter priced in long ago, or was looking for the essential elsewhere.
TUI is a company that has been splitting in two for the last three years. One half - hotels, cruise ships and excursion sales in destinations - is growing, raising prices and breaking records. The other, the original one the company is named after, i.e. tour operators and its own airline fleet, has been shrinking for two straight years. Last year its profit fell by a third. This year, in the quarter when the season kicks off, it is in the red.
When one half of the company behaves like a growth business and the other like a business in decline, the stock price sticks to the worse of them. The question for an investor is therefore not whether TUI is cheap - that is obvious at first glance. It is whether it is cheap for a good reason.