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This is what I’d do about the Saga share price right now

FTSE 250 insurer Saga (LSE: SAGA) is out of favour with the market, but I believe this over-50s specialist could be a good long-term income buy. Today, I want to explain why I’m a fan of this business. I’ll also take a look at another turnaround situation that’s in the news.

Why is Saga special?

The insurance market is tough. Most buyers see the product as a necessary evil, rather than a desirable purchase. That means, very often, decisions are made on price alone.

Insurance companies are fighting back by trying to find ways of offering additional services to their customers. They hope this will help to build loyalty and support higher profit margins.

In my view, Saga should have a head start in this market. It’s one of only a handful of major insurers I can think of which has a clear selling point — it provides products and services for over 50s only.

Alongside insurance and related travel services, this also includes a cruise ship holiday business — a sector that’s booming at the moment. The company has also built a loyalty programme with more than a million members who should be receptive to targeted marketing.

Do the numbers stack up?

Saga’s adjusted earnings are expected to have fallen by 6.5% during the ended 31 January. Analysts are forecasting a further 2% drop in 2019/20. This leaves shareholders exposed to the risk that dividend cover will gradually be eroded, resulting in a dividend cut and a falling share price.

My view is that this looks unlikely at the moment. The group’s cash generation — which supports the dividend — has remained stable and net debt fell by 6.7% during the first half of the year.

Meanwhile, insurance policy numbers have started to recover and the group says that bookings for its two new cruise ships are on track. With the stock trading on 9 time’s forward earnings and offering a 7% yield, I continue to see Saga as a turnaround buy.

Dining out

Another turnaround stock that’s in the headlines is Restaurant Group (LSE: RTN), which owns Frankie & Benny’s and has recently acquired the Wagamama chain of Asian restaurants.

Sales and profits have been in decline since 2016. Results published today showed that adjusted pre-tax profit fell by 8% to £53.2m last year, but total sales edged 1% higher to £686m.

The company says that its pub and airport businesses are performing well and that Wagamama is “continuing to outperform the sector.” In the meantime, detailed work to improve performance at Frankie & Benny’s and Chiquito is underway.

My view:

This is a complex turnaround situation that depends on good execution by management. Unfortunately, chief executive Andy McCue is due to leave shortly, adding to the uncertainty facing the firm. Another risk is that the group took on debt to buy Wagamama and now has net debt of £291m, which looks quite high to me compared to profits.

Despite these risks, I’m beginning to think that the worst may be over for Restaurant Group. With the stock now trading on 10 times 2019 forecasts earnings and offering a 5% yield, I think there could be an opportunity here. I’d rate the shares as a speculative buy.

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Roland Head 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.