Saga shares are rising. Here’s what I’m doing

Saga shares have been gaining momentum. But is this a buying opportunity? Here I’ll take a closer look at the company.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I first commented on Saga (LSE: SAGA) shares back in January. I’ve been watching the stock like a hawk since then. The share price has been rising and I think the prospects look promising.

I’d consider buying Saga shares in my portfolio and here’s why.

The results

Last week, Saga released its full-year results. At first glance, the figures look dismal. Underlying profit before tax fell to £17.1m from £109.9m in the previous year. That’s a big drop.

But I think most investors are focused on Saga’s travel business, which operates worldwide tours and cruises for the over-50s. People know by now that the travel industry was one the pandemic’s victims. I think this is already priced in to the shares.

I prefer to remember that Saga also operates an insurance business, which has held up well. In fact the company refers to this division as delivering a “resilient financial performance”.

Bright side

I’m pleased to say that the news isn’t all bad on the travel side. The results did highlight some optimism. Saga is ready to resume its tour operations and cruise businesses this year. I guess it’s waiting, like me, for further details regarding government restrictions.

It’s encouraging to see that customer demand remains strong. Saga highlighted that there has been a 20% increase in total cruise bookings so far compared to the same point last year. This shows me that not only is there customer loyalty from the over-50s demographic, but also significant pent-up travel demand.

I think it’s worth noting that the UK vaccine rollout has so far been successful. Older consumers have been prioritised, which means they’re likely to be the first group of people to get the go-ahead to travel abroad. Of course, this is just me speculating. I’ll have to wait and see what the government announces in due course.

Risks

While Saga shares have been rising recently, the stock comes with risks. My main concern is the company’s debt pile. At the end of January, Saga’s net debt position stood at £760m. But when this is compared to the company’s current market cap of £541m, it’s safe to say the company is highly leveraged.

At some point this will have to be paid off. And it doesn’t help when Saga can’t operate its travel business fully due to government restrictions. While things may be looking positive for the travel industry, Saga’s management acknowledges the “economic headwinds” ahead. Any delays in the easing of travel restrictions are likely to impact the stock. 

My view on Saga shares

I’m not really worried about the debt level for now. I reckon once the travel industry opens up, Saga’s revenue and profitability will bounce back very quickly. This means that the affordability of its liabilities will improve.

For now, the company has enough liquidity. This comes after former CEO Sir Roger De Haan pumped £100m of his own money into Saga. In fact he’s now Chairman. Sir Roger certainly has skin in the game and I think he will be working hard to make his investment a success.

I reckon the worst is over for Saga shares. The over-50s often have plenty of disposable cash and the demographic is growing in size. This should work in the company’s favour in the long term. Hence I’d buy the stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Nadia Yaqub 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.

More on Investing Articles

A young Asian woman holding up her index finger
Investing Articles

A “once in a lifetime” opportunity for Rolls-Royce shares?

One firm is hoping now is a “once in a lifetime” opportunity for UK nuclear companies. Our writer reveals whether…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

The IAG share price is dirt cheap and profits are flying. So why am I worried?

After today's positive full-year results, I expected the International Consolidated Airlines Group (IAG) share price to be doing better than…

Read more »

Investing Articles

Is Tesla stock a steal below $200?

Tesla stock has fallen 19% so far in 2024. Currently hovering around $200, this Fool checks if now is the…

Read more »

Investing Articles

3 high-yield dividend stocks to consider for my passive income portfolio in 2024

I want to build a portfolio of dividend stocks that pay enough passive income to retire comfortably. Here are my…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Direct Line shares soar 25% on takeover bid!

Direct Line shares surged by a quarter on Wednesday, after receiving a takeover bid from a Belgian rival. But the…

Read more »

Investing Articles

Will it be too late to buy Nvidia stock in March?

NVIDIA stock is up more than 60% since the start of 2024. Our writer considers whether it might still be…

Read more »

Typical street lined with terraced houses and parked cars
Investing Articles

Why did Direct Line shares just soar 27%?

Direct Line shares have jumped more than a quarter in the course of today's trading session. Our writer explains why…

Read more »

Close-up of British bank notes
Investing Articles

These 2 shares are Dividend Aristocrats. Which should I buy this March?

Our writer likes the business model of this pair of FTSE 100 Dividend Aristocrats. So why would he only consider…

Read more »