Stock of the week: TUI

Summary:

• TUI (TUI.UK and TUI.DE on xStation5) released its earnings report in the previous week

• Crisis in Turkey exerts downward pressure on travel company

• Company looks much more profitable than its biggest local competitor

• Stock has broken out of the downward price channel recently

One of the companies that has enjoyed increased interest recently is TUI (TUI.UK and TUI.DE on xStation5). There are two reasons behind this. The first one is the earnings report release that took place at the end of the previous week while the ongoing crisis in Turkey is the second one. In this analysis we take a look at the TUI’s latest financial data, possible impact from the Turkish crisis as well as compare the company with its biggest rival.

Third quarter of the calendar year is seasonally the best one for TUI. Source: Bloomberg, XTB Research

Let’s start with the latest TUI earnings report that was released at the end of the previous week. The company managed to achieve a revenue of €5.016 billion in the third quarter of the fiscal year (corresponding to the second quarter of the calendar year). While this marks around 5% increase against the previous year the company’s EBITA (TUI’s preferred earnings measure) shrinked by 18% to €193.4 million in the same period. However, it may not be as disappointing as it seems. Indeed, the company saw a slowdown in the holiday package sales growth but other businesses seem to be booming. Namely, the hotels and cruises divisions’ sales jumped significantly. This is especially important as the company tends to have higher margins on such services. As sales of holiday packages account for the biggest share of TUI’s revenues such a development may look a bit worrying for some. However, it can be ascribed to the one-off factors. Namely, the company explained that a slowdown in holiday sales resulted mainly from the significant drop in the Northern European businesses (biggest market for TUI) caused by customers’ reluctance to travel due to the World Cup being held in Russia. Apart from the football championship, the company recognized weaker GBP as well as temporary air traffic control strikes in France as factors hurting last quarter’s results. However, despite smaller earnings on YoY basis the company stays optimistic about the remaining part of the year and decided to uphold its annual guidance of double-digit profit growth. It should be noted that if this turns to be true it will be the fourth consecutive year of such robust earnings growth.

Another reason why TUI has received bigger investors’ attention lately is the ongoing situation in Turkey. After few years of declining interest in trips to Turkey the travel company recognized a reversal of this trend in its 2017 annual report. Moreover, prior to the launch of this year’s holiday season TUI named Turkey as one of the top 2018 destinations. The assessment of impact of the current Turkish crisis on the company’s performance may be a bit tricky. The weakening of lira may translate into bigger demand for trips to Turkey as they would become relatively cheaper. In such situation the company would be able to charge higher margins as weaker TRY would translate into lower cost for the company as well. However, TUI exposure to the Turkish currency is probably hedged therefore the tailwind from the FX rate factor is unlikely to surface this year. If the current currency crisis is to extend over the next years it may as well be accompanied by the economic downturn in Turkey and question country’s stability therefore making it much less attractive for tourists. In such case the resulting decrease in sales will most likely offset any potential benefit from more favourable exchange rates.

TUI Group and Thomas Cook Group comparison. Data as of the end of 2017. Source: Bloomberg, XTB Research

Comparing TUI Group against its biggest local competitor, Thomas Cook Group, one can see striking differences between the two. First of all, Thomas Cook Group has much steeper P/E ratio, reflecting investors’ trust in the ability to maintain growth. Moreover, Thomas Cook looks almost 10 times as indebted as TUI. EPS and profit margin are higher for TUI.However, the revenue dynamics is much higher for the  Thomas Cook Group so investors may expect higher profits down the line . Nevertheless, it should be noted that Thomas Cook Group is much smaller entity than TUI. TUI had over four times bigger market capitalization than Thomas Cook Group at the end of 2017 and its revenue was almost twice as big as Thomas Cook’s. On top of that, let’s say that comparing those two particular travel companies is more than justified (apart from differences in size) as the United Kingdom is the biggest market for both TUI and Thomas Cook and therefore risks and uncertainties associated with the Brexit are more or less equally reflected in the financial data of both stocks.

TUI (TUI.UK) has been trading in the downward channel since it peaked at 18.16 in mid-May 2018. Decline accelerated following the surpassing of the 200-session moving average (purple line on the chart above). Source: xStation5