The TUI share price has crashed 52%! Should I buy?

Spare a thought for long-term investors TUI (LSE:TUI) shares. In the last month, TUI’s share price changed to +52%. Over five years, the decline was even more pronounced – the stock fell by 82%.

So why have tourism operators struggled in recent years? And does the falling stock price make this stock a buy for my portfolio today?

Let’s explore.

A weak balance sheet

Perhaps the biggest problem facing TUI is the €3.4 billion net debt burden that the business carries (excluding lease obligations). In order to survive the pandemic when international travel suddenly stopped, the company took on a lot of debt. The Hannover-based company received help from the German government as well as other creditors.

Last week, the holiday group took an important step to solve its balance sheet problem. Through the €1.8bn discount rights issue, TUI hopes to bring its ballooning net interest payments under control, reducing them by an estimated €80m to €90m.

Going forward, this is a promising development that could provide the necessary route to business recovery by reducing net debt to pre-pandemic levels. However, this represents a massive dilution of existing shareholder interests and the initial market reaction was a massive sell-off in the company’s stock.

If TUI needs to be further diluted in the future, confidence in the company’s ability to generate attractive returns could evaporate. Also, the dividend is still issued, so this is not an ideal stock for passive income seekers.

The silver lining

That said, there are signs TUI is heading in the right direction. Helped by the recovery in the global tourism market, revenue for Q1 FY23 increased year-on-year from €1.4bn to €3.8bn. This means a reduction in the company’s losses, with underlying EBITDA at -€153m, compared to -€274m in the previous year. The group expects both figures to see strong improvement over the next year.

The company is also expanding its offerings. It recently launched several accommodation-only products in Scandinavia and is currently piloting a tourism platform in Belgium. In addition, digital capabilities remain a top priority with further application development plans.

Although this is a nice feature, I’m not sure that it really affects the big picture. In fact, the expected recovery of TUI’s share price will be driven by the core metrics that investors care about, namely debt levels, sales, and profits.

Should I buy TUI shares?

There are some indications that the green tip of recovery is starting to emerge for TUI. The macro background has improved significantly, with public health restrictions no longer a serious obstacle to trading activity.

However, net debt remains a big problem – and enough to keep me from investing right now. Of course, there is always a path to a brighter future for the company and I will keep TUI stock on my watchlist. However, I’m not sure the risk/reward profile of the stock is attractive, especially considering there could be further dilution of shareholder interests.

I will look at other stocks in the travel sector to take advantage of the recovery, but for now, TUI’s finances are not strong enough to buy today.