The last time I covered Saga (LSE: SAGA) shares was in November 2019. At the time, I said that there were signs that the company was turning things around. However, I also said that there was a long way to go and that there were much better stocks for investors to buy.
Since that article, Saga’s share price has fallen from 59p to just 17p. That represents a decline of about 70%. Are Saga shares worth buying at today’s rock-bottom prices? Let’s take another look at the investment case.
Saga’s share price has tanked due to Covid-19
It’s not hard to see why Saga’s share price has tanked in 2020. As a result of Covid-19 lockdowns, the travel side of the business (which generates around 50% of revenues) has been decimated. Since mid-March, all of its cruise ship operations have been suspended. Recently, the company advised that as of 31 May, it had cancelled all travel departures up to and including August.
This setback is clearly going to hit near-term revenues and earnings quite badly. The magnitude of the impact is impossible to determine at the moment. However, Saga said in April that it expects revenue for the full year to be lower by around 65% for tour operations and cruise if the cruise business is suspended for six months.
Can Saga rebound?
Could the company turn things around now that lockdowns are easing? That’s hard to say due to the uncertainty associated with Covid-19.
In a trading update on 22 June, Saga said that it continues to expect “some travel to resume this year”. However, it added that it has considered various scenarios for the travel side of the business including one in which travel is not resumed until 2021.
My concern is in relation to future booking numbers. Saga recently said that it has retained over 70% of advance receipts on cancelled cruise departures. It also said new bookings for next year have been “very positive”. I am a little sceptical about near-term booking numbers, though. Given that Saga caters to the elderly segment of the population – who are more vulnerable to Covid-19 – my belief is that cruise ship passenger numbers won’t return to pre-Covid-19 levels for quite a while. This adds uncertainty to the investment case for Saga shares.
Saga’s dividend has been suspended
There are other issues that add uncertainty as well.
One is the group’s debt position. At 31 January, net debt totalled £594m. This could potentially present problems if operating conditions don’t improve soon.
Another is Saga’s dividend. In the past, Saga shares had appeal from an income perspective as the dividend yield was attractive. However, the dividend has now been suspended due to the challenges the company is facing. We don’t know when it will be reinstated.
Are Saga shares a good buy?
Weighing everything up, I think the best move for investors is to avoid Saga shares at the moment.
Given the uncertainty associated with Covid-19, the shares are too risky to buy right now, in my view.
All things considered, I think there are much safer stocks to buy.
