Is this UK stock a once-in-a-lifetime opportunity or a value trap to avoid?

Share on TUI (LSE:TUI) is up 16% since the start of the year. If the post-pandemic travel recovery can push the stock back in 2019, there is a potential 180% gain for investors.

I think this is impossible, though. Rather than a once-in-a-generation opportunity, this looks like a value trap.

TUI

In 2019, TUI made an operating profit of £402m and its share price reached £4.58. This is the result of three things.

First, the company’s low level of debt means that most of its operating income flows to the bottom line. £402m in operating income translated into £371m in net income.

Second, the company has around 1.1bn shares outstanding. As a result, £371m in net income means 34p in earnings per share (EPS).

Third, the interest rate is at 0.75%. Consequently, investors are willing to pay a price-to-earnings (P/E) ratio of 13 for the company’s stock.

None of these things in 2023. The company has more debt, more stock, and higher interest rates.

This means I don’t see the stock returning to 2019 levels anytime soon. Although travel demand means TUI’s operating income is back to £402m, I think there are still problems.

Issue

The first issue for me is the company’s balance sheet. TUI’s interest payments on its debt have risen from £69 million in 2019 to £401 million last year.

As a result, if the company makes £402m in operating income today, that will not leave £371m in net income. As I see it, it leaves almost nothing after the company has paid interest.

Therefore, I doubt that a return to pre-pandemic operating levels will mean a return to net income levels in 2019. But even if they do, there are other issues.

Back in 2019, net profit of £371m equates to 34p per share. But TUI increased its share count by 63%.

That means £371m in net income now equates to 21p in EPS. Applying a P/E ratio of 13 to that number still leaves the stock slightly short of 2019 levels.

The final problem for TUI stock has nothing to do with the company’s intrinsic features. Interest rates are now higher than in 2019.

Instead of 0.75%, the Bank of England base rate is now 3.5%. And with inflation still high, the rate looks set to rise again.

As a result, investors pay less for the stock than before. And this makes me doubt that TUI shares will trade at the same P/E ratio as in 2019.

Trap value

TUI shares are currently benefiting from renewed travel demand. And this may push the stock higher in the near term.

However, as an investor, this just doesn’t add up for me. Although it was able to recover the level of operating income in 2019, the business faced significant problems.

TUI’s debt lowered net income, the number of shares weighing on EPS, and higher rates made it impossible to trade at the previous P/E ratio. Each of these is a big problem.

Stocks are down 75% over the past five years. But this whole thing seems like a value trap to me.