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The Saga share price has soared by 50%. Here’s why I’d buy

Saga (LSE: SAGA) has been a big beneficiary of this week’s rebound in leisure stocks. The Saga share price is one of Wednesday’s winners, with a massive 50% gain by noon.

The shares are still more 50% down since the start of 2020, but recoveries rarely start off better then this. If we’re really looking at a genuine recovery, that is. I am bullish about the FTSE 100‘s prospects for recovery in the medium term. But I do think there’s a very real chance of a double-dip stock market crash before that happens.

Still, in my experience, shares that are badly depressed by a crisis almost always recover. And it’s often relatively quickly. That leaves me puzzling a little over why people sell out during a crunch, when history unambiguously shows that’s the wrong thing to do.

Saga share price

Well, it’s not always necessarily the wrong thing. Hanging on to shares in a company that’s at risk of going bust can be a bad move. But then, I’d say buying such shares in the first place is the real mistake. And with the Saga share price falling 45% this year at its worst, many investors must have seen a risk of bankruptcy there.

The firm has shown a net debt to EBITDA ratio that I would often consider a little disturbing. But at year-end, the company was facing only £109m of short-term net bank debt. I think that should be easily serviceable without any risk of a liquidity crisis.

Demand improving

Saga had been facing problems with falling demand in its targeted market of over-50s travel. It attempted to address it by further expansion into the cruise market, but then the Covid-19 blow struck. Still, the company has reported that customers have already booked 81% of its cruise capacity from September onwards. And of those who had cruises cancelled, more than half have already rebooked. I see that as positive for the long-term progress of the Saga share price.

Tough year

The current year looks sure to be a dreadful one, but forecasts still indicate a profit. And that’s something many of today’s strugglers won’t manage. Judging by the current consensus, we’re looking at a price-to-earnings ratio of only a little over 7. And if the forecast rebound in profit in the 2021–22 year comes off, it would drop that multiple to under 4.

I think that suggests the Saga share price is at a level where the company is expected to go bust. And I just don’t see any real chance of that happening.

Dividend

The firm’s dividend has been a disappointment in the past couple of years. Saga slashed it by more than half in 2019, and then suspended it entirely this year in response to the Covid-19 crisis. Analysts expect a small dividend in 2020–21, but I can’t help wondering if that might be a mistake. I’d rather wait and see the company fully back on its feet and looking at growing earnings. Like the Saga share price itself, I look at dividends with a long-term view.

I’ve been cautious about Saga in the past, but I do think I’m seeing a buy now.

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Alan Oscroft 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.