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Should I buy Saga shares now?

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Saga's 'Spirit of Adventure' cruise ship
Image: Saga

Shares in over-50s insurance and travel company Saga (LSE: SAGA) appear to be in recovery mode right now. Over the last three months, Saga’s share price has risen about 50%. Meanwhile, over 12 months, it’s up about 75%.

Should I buy Saga shares today? Let’s take a look at the stock.

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Saga shares: the bull case

There are a number of things to like about Saga shares right now. The first is that recent full-year results, for the year ended 31 January, showed signs of a turnaround in the company’s insurance division.

After several years of declining policy numbers, Saga-branded motor and home policies were up by 1.1% for the year. Meanwhile, underlying profit before tax in the insurance division rose 2.9% to £134.6m. This turnaround is encouraging.

The second is that there’s pent-up demand on the travel side of the business. Although Saga’s cruise operations are still suspended, for 2021/22 and 2022/23 it has £154m worth of cruise bookings. If cruise operations commence soon, profits could get a boost.

Third, CEO Euan Sutherland just purchased a large amount of Saga shares. Regulatory filings show that on 5 May, the insider picked up 51,259 shares at a price of £3.86 per share (nearly £200k worth of stock). This purchase increased the size of his holding by nearly 200%. This is very encouraging, in my view. No one has better insight into a company’s performance and prospects than its top-level insiders.

Finally, the valuation using next financial year’s expected earnings looks undemanding. For the year ending 31 January 2023, analysts expect the group to generate earnings of about 57p. That puts the stock on a forward-looking price-to-earnings ratio of just 6.9, which is very low.

The bear case

However, I do have some reservations about investing in Saga shares. One is that the company has a significant amount of debt on its balance sheet. At 31 January, the group had long-term debt of around £820m on its books.

This adds risk to the investment case as debt tends to make companies more vulnerable. However, it’s worth pointing out that £250m of this debt is a corporate bond that matures in May 2024, so the company has some breathing space here.

Another concern is that Saga hasn’t been very profitable. In the three years before Covid-19, it generated returns on capital employed  (a measure of profitability) of 7.2%, 6.8%, and -5.8%. These figures are poor. Top companies tend to generate ROCE of 20%+.

Additionally, Saga has a poor dividend track record. In FY2019, the company cut its dividend from 9p per share to 4p per share. Then, last year, it cut its dividend completely.

My view now

Overall, my assessment of Saga is that it’s not a ‘high-quality’ business. So, weighing everything up, I’m going to stay on the sidelines for now.

I do think Saga’s share price could keep rising in the near term, but I don’t see the stock as a good fit for my portfolio.

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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.

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