Saga (LSE: SAGA) shares have plunged in value since the beginning of 2020. Shares in the over-50s travel and finance specialist have fallen nearly 70% since the beginning of the year.
Investor sentiment towards the company has weakened significantly as investors have priced in the uncertain economic outlook facing the organisation. Despite this setback, Saga shares may deliver a strong performance for investors in the long run.
Saga shares: under pressure
Saga had been pinning its hopes on the launch of several new cruise ships to drive growth over the next few years. However, to stem the spread of the coronavirus, cruise ships around the world have been grounded. This will hit Saga’s earnings for the next 12 months at least.
The good news is that cruise cancellations haven’t put customers off from booking. According to a recent trading update from the business, 81% of cruise capacity from September onwards has already been sold. What’s more, around half of the customers who were booked to travel on recently-cancelled trips, have re-booked.
These figures suggest that customers trust Saga, and will be happy to travel with the group once again when this crisis is over. Moreover, it seems Saga’s other primary business, insurance, will escape the crisis relatively unscathed.
While costs could rise due to supply chain disruptions, the company expects fewer accidents. Overall, the net impact should be minimal as a result. This diversification, coupled with the group’s reputation with customers, should help Saga shares recover in the long run.
To help cope with the downturn, Saga has suspended dividends for the foreseeable future. The company was due to pay out 2.6p per share this year. But management has decided to hold back these funds for the time being.
At the same time, the company has stripped out £15m of costs across the business. It’s also renegotiating credit facilities with lenders. These efforts should provide the group with the financial flexibility required to stay afloat through the crisis.
Looking ahead, these actions should support Saga shares in the long term. Saga’s operations may continue to take a hit in the short run, but the company’s strong balance sheet, coupled with its reputation, should help it overcome the current economic dilemma.
The group’s diversification also provides a buffer against economic uncertainty. As such, now could be an excellent time to snap up a share of this business at a discounted price. The stock is trading at its lowest level on record.
That suggests the Saga share price offers a wide margin of safety at current levels. Even though the company’s recovery may not be smooth, I think its share price has tremendous potential for investors who buy today with a long-term outlook.
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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.