Monday morning’s top BBC news headline is all about the rapid and tragic coronavirus spread, with containment battles now spreading as close to home as Italy. In turn, the news is hitting stock markets, with the FTSE 100 dipping 3.4% in early trading. And, perhaps not surprisingly, travel companies are among the big fallers.
Shares in budget airline easyJet (LSE: EZJ) fell as much as 13.5% at one point, though the apparent panic really needs to be seen with a longer-term perspective. Since a dip in June last year, when the Thomas Cook collapse was just a few months away, easyJet shares are still up 55%.
Over five years, though, we’re looking at a 20% fall, and it’s been a very rocky ride. I think that helps us see the coronavirus-related sell-off as what it is in easyJet terms, just one of a whole series of events that can send the shares soaring or slumping. If you invest in an airline, I think you have to be prepared for volatile share prices.
But at least with easyJet you’ll have had some decent dividend income to see you through. The dividend itself can be up and down, but a well-covered 3.8% yield in 2019 was healthy, and forecasts suggest 3.9% this year. Those same forecasts now put the shares on a forward P/E of 12.5. That’s modest, but I don’t see a good enough safety margin.
On bullish valuations, I expect easyJet shares to react more severely than most to weaknesses. So it’s not for me, but if you do like this kind of stock, I’d treat short-term dips as buying opportunities.
The bearish mood has extended across the travel business, with TUI Travel (LSE: TUI) losing 11% shortly after the markets opened. The wider picture here is different, though, as TUI shares have been under intense pressure over the past few years as high-street travel agents feel the pinch.
From a recent peak in May 2018, TUI shares are down 56%. But in this case, I think investors are looking for a recovery over the next few years. Forecasts suggest an earnings rise of more than 30% for 2020, and that would put the shares on a P/E of only eight.
In turn, the share price weakness has pushed the dividend yield to 4.8%. And that would be covered more than 2.7 times by earnings. Looking good? There are downsides…
One is the dividend trend. Although the current yield looks attractive, TUI has a new dividend policy in place and payments are way down on 2018’s peak. That seems wise, seeing as TUI’s net debt stood at €5,072m (£4,253m) at the end of the first quarter. And that debt is the other thing I really don’t like.
I’m also concerned that recent upbeat sentiment after a record-breaking Q1 is already fading. TUI enjoyed a boost from business that would have gone to Thomas Cook, but the long-term pressure on the industry is still there.
TUI shares look cheap, and the company is expanding by acquisition. But though I could see profit for investors over the next two or three years, a future downturn coupled with the weight of debt could result in tears. It’s just too risky a business for me.
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Alan Oscroft 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