When I last covered Saga (LSE: SAGA) in late April, the stock had just crashed spectacularly on the back of terrible full-year results and a dividend cut. At the time, I said Saga was a stock to avoid due to the challenges the business was facing. In hindsight, that was a good call as the stock then nearly halved in value over the next few months.
However in recent months, Saga’s share price has begun to rebound. Since hitting a low of 32p on 19 June, it’s risen to 58p, up around 80% in just four-and-a-half months. Here, I’ll look at why Saga shares are rising and explain how I’d play the stock now.
No nasty surprises
The main reason Saga’s share price has rebounded recently is that the group’s half-year results, released on 19 September, contained no nasty surprises. While half-year profit was down significantly (this was expected), full-year underlying profit before tax guidance of £105m-£120m (the figure Saga provided in April) was confirmed. In other words, there were no further profit warnings.
At the same time, the half-year results showed signs the group could be starting to turn things around a little. For example, Saga advised:
It had seen a ‘positive response’ to new product offerings with over 175,000 three-year fixed price policies being sold since launch
Its direct-to-consumer strategy is generating an improved share of new business (53% vs 44% last year)
Cruise revenue targets for 2019/2020 have been fully achieved
CEO Lance Batchelor also said the group has made “good progress” against its strategic reset. So, overall, there were a number of positives from the half-year results.
It’s also worth noting on 15 October chairman Patrick O’Sullivan purchased 100,000 Saga shares, which increased his holding by 63%. Given that company insiders tend to have more information in relation to future prospects than anyone else, this could be interpreted as a bullish signal and it may have contributed to Saga’s recent share price rise.
What’s the best move now?
Are Saga shares worth buying right now? Personally, I don’t think so. While there are signs the company could be beginning to turn things around, there were also things in the half-year report that suggest the company has a long way to go.
For example at 31 July, total net debt stood at £643m, up from £391m last year. That’s a sizeable increase. The interim dividend was also reduced from 3p to 1.3p, which is another turn-off. I like to see a solid track record of dividend growth.
Ultimately, I’d like to see more evidence Saga has regained the trust of its customers, and that profits are likely to rise in the future, before buying the shares. Saga shares do look cheap at present (the forward P/E ratio is just 7.5), however, all things considered, I think there are much better stocks elsewhere to buy right now.
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Edward Sheldon has no position in any 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 2019