When leisure stocks spiked upwards at the end of May, Saga (LSE: SAGA) was among them. With the Saga share price rising, it looked like the over-50’s holiday specialist might be recovering quickly.
I’m convinced the Saga share is indeed on for a recovery. It might not, though, rebound as quickly as first hopes suggested. In traumatic times like these, it’s pretty much inevitable that anything positive will come in fits and starts. So even though I think we’ll see a solid Saga share price gain over the next year or so, I expect further volatility.
Saga’s offerings for its target market had been going off the boil a bit. But its move further into the cruise business was definitely turning things around. That is, until the coronavirus pandemic knocked holidays on the head in general. And cruising, with so many people packed in close proximity, really doesn’t seem like a good idea right now.
But looking beyond the short-term havoc, demand for Saga’s offerings looks solid. The bulk of cruise capacity from September onwards has already been booked up. And though cruises in the short term have all been cancelled, around half of those affected have already re-booked.
What am I really looking for when I consider the Saga share price as a recovery opportunity? Well, apart from the likelihood of strong long-term demand, I want to see a margin of safety. Now, safety is a bit of a scarce commodity right now, with so many companies struggling. So what does safety really mean for me here? It’s the ability to keep the wolves from the door and keep the company running until things pick up again.
I see no real danger, and very little chance of the Saga share price heading for zero. I also think it’s very unlikely we’ll see any new equity issue, which would dilute existing shareholders to some degree at least. As of the firm’s April update, it looks like it will have sufficient funding from its own cash resources and from debt.
The company has put in place a number of cost saving measures, including suspending its dividend. Saga has also agreed amendments to its banking covenants, to allow net debt to EBITDA to rise over the coming year. On top of that, Saga has “strong liquidity and diversified sources of income… due to the cash generative Insurance business,” and has further cash coming from disposals.
Saga share price weakness
I suspect the Saga share price will remain subdued for a while longer, until we see more clarity over medium-term profitability. And one key milestone will surely be the reinstatement of the dividend. Saga has been a very attractive buy for investors seeking income, and I doubt many of those will come back on board until it starts up again.
I see Saga as a stock that’s priced to go bust, but with no real chance of that happening. It’s a buy for me.
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.