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I was right about the Saga share price in 2020. Here’s what I’d do now

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In the second half of last year, I was cautiously optimistic about the outlook for the Saga (LSE: SAGA) share price. However, as the year moved on, I became increasingly confident about the company’s prospects.

In December, I thought City growth forecasts for the group were too pessimistic. On that basis, I believed the stock was undervalued, based on its long-term potential.

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I reiterated this view in January, noting that Saga seemed to have drawn a line under its past issues.  Since then, the Saga share price has continued to increase in value. And I think the company’s recovery may continue throughout 2021. 

Recovery underway

Since the beginning of the year, shares in the over 50s travel and finance specialist have increased in value by 60%. Over the past 12 months, the stock has gained 74%. 

A lot has changed at the company since the beginning of last year. The pandemic drove the business to raise more money from shareholders. But there was a silver lining in this cash call.

As part of the fundraising, Saga’s former chief executive, Sir Roger de Haan, took a significant stake in the company and returned to its boardroom as chairman.

This was just one part of the group’s plan to reinforce its balance sheet. It has also renegotiated credit conditions with lenders, and it’s planning to raise more capital through debt

These initiatives should help dispel any concerns about the company’s financial position. With these problems dealt with, the business should be able to concentrate on reopening operations over the next few months. 

And, on this front, it seems the company’s customers can’t wait to get back to travelling.

Saga share price boost

The company has two main business divisions. There’s its financial arm, which offers products such as savings and insurance. Then there’s Saga’s travel business. Like most travel operations, the pandemic has severely impacted this division. 

However, over the past 12 months, the company has continually registered high demand from its former customers for potential travel in the future. It noted in its latest trading update that the firm continues to “see strong pent-up demand for travel among our customers and remain well placed to deliver on this opportunity when the guidance on international travel changes.

This is the primary reason why I think the Saga share price can continue to move higher. As the economy reopens, customers look set to return in large numbers, which will help power the company’s turnaround.

Risks and challenges 

That said, this is by no means guaranteed. The corporation is registering a high level of customer interest, but there’s no guarantee this will translate into bookings.

There’s also a big question mark over how profitable the group will be when all the restrictions are lifted. Extra health and safety measures may push up costs. This could impact profit margins.

At the same time, the group has a lot of debt. This may limit its ability to produce returns for shareholders in the medium to long term.

Still, despite these challenges, I’d buy the stock for my portfolio today as a recovery play. 

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Rupert Hargreaves 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.

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