The Saga (LSE:SAGA) share price has been on fire recently. Since the start of 2021, it has moved up more than 60%. And looking at the last 12 months, the stock is nearly 70% higher. For a travel and insurance business, seeing this level of growth is quite extraordinary, especially since it wasn’t too long ago that investors feared it was heading for bankruptcy. After all, the pandemic forced its travel division to remain in limbo through 2020. Let’s take a closer look at what happened, and whether the share price can return to its former glory?
The Saga share price recovery
I’ve previously explored what caused the Saga share price to initially collapse back in early 2019. But as a quick reminder, the original management team led by former CEO Lance Batchelor made a series of poor decisions for almost four years. The company openly admitted to being overly focused on short-term gains and ultimately led the business to the brink of bankruptcy.
It would have likely happened if it weren’t for the return of Saga’s original owner Sir Roger De Haan. He purchased £100m of shares as a rescue package and now owns a 20% stake in the business as well as serving as the new chairman of the board.
Since then, a new CEO has been brought in and the company underwent massive restructuring. Such undertakings, while often necessary, are rarely pleasant. And this, unfortunately, led to 36% of employees being made redundant. As sad as this is, it appears to have been a prudent decision. Total losses were reduced by nearly 80%, travel bookings rose by 20%, and even its historically poor-performing insurance business saw growth for the first time in years. So, seeing the Saga share price rise on this comeback was hardly surprising to me.
Time to buy?
As promising as the recovery progress has been, it’s worth noting that the business remains unprofitable and has around £823m of debt on its balance sheet versus only £102m of cash. The vast majority of these loans don’t need to be paid off for another couple of years. But it will likely have to raise additional capital to remain afloat if the business can’t return to profitability in time. Needless to say, that introduces some significant risks, I feel.
But as the vaccine rollout continues, travel restrictions have begun to ease. And Saga’s cruise lines operations, which were suspended in 2020 due to the pandemic, are getting ready to set sail again in June this year.
Assuming that it can return to its pre-2019 level of profitability of around £140m, the Saga share price does look relatively cheap at today’s market capitalisation of £520m. And it seems new CEO Euan Sutherland agrees, given he just purchased 51,259 shares for about £198,000. This is in addition to the 78,489 shares he received in April as his annual bonus. In my experience, when managers start buying vast sums of shares in the businesses they run, it’s generally a good sign. After all, there are plenty of reasons to sell, but only one to buy.
My thoughts on this business
The new strategy seems to be working. I do believe a complete recovery is possible over the long term despite the solvency risks the company currently faces. And therefore, I would consider adding a small position of this business to my portfolio.
