EasyJet (LSE:EZJ) shares have lost almost a third of their value in the last week, while Ryanair Holdings (LSE: RYA) and TUI Travel (LSE:TUI) shares are both down by just over a quarter. Does that mean these shares are now bargains?
If nothing else, recent stock market turmoil proves that markets are not rational.
The valuation of a company is meant to be a reflection of future dividends, discounted by a certain interest rate to give a net current value. If stock markets were rational, there would only be two possible explanations for a sharp rise or fall in valuations: either something important has occurred that will significantly change future dividends, or there has been a revision of expected long-run interest rates.
In my view, while the economic impact of the new coronavirus will be much greater than is commonly supposed, there should be no material impact on dividends paid out in future years. I would argue that the only rational justification for a sharp fall in share prices caused by the coronavirus is fear that the virus may cause the company to go bust.
Ryanair’s total assets are worth 1.6 times liabilities, and for easyJet the ratio is marginally lower. For TUI, it is around 1.33.
In all three cases, current assets are worth less than current liabilities, which may make you feel concerned, but that is typical of the sector they operate in.
I suspect that there will indeed be corporate casualties caused by the coronavirus in the airline and holiday business. I think it is unlikely that eastJet or Ryanair will be among them. I expect future revenues and profits at the two companies will recover.
Looking at TUI, it is tempting to draw some kind of inference from the collapse of Thomas Cook, but while both companies faced similar headwinds, Thomas Cook had an extra challenge — large debts incurred to fund its purchase of My Travel.
If you felt the three companies were fairly valued before news of the virus hit, then, right now, they would all appear to be bargains.
The stronger case
There is another aspect not yet appreciated by the markets. If the coronavirus continues to spread and leads to some corporate collapses in the airline and holiday business, then those companies that survive should benefit, as they will be able to expand by filling the void created by bankrupt businesses. The rational thing, then, would be for the markets to push upwards on shares in airlines and travel companies unlikely to go bust.
Is now a good time to buy shares in easyJet, Ryanair, and TUI? If the markets suddenly went all rational, yes it would be. The economist John Maynard Keynes once said: “Markets can remain irrational longer than you can remain solvent.” I suspect that the markets will irrationally sell for longer yet, and I think that shares in these companies have further to fall before they eventually recover.
The post Is now a good time to buy shares in easyJet, Ryanair, and TUI? appeared first on The Motley Fool UK.
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Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020