So what caused the Saga share price to start climbing? Will it rise even higher? And should I be adding the stock to my portfolio?

The rising Saga share price

Saga recently published its preliminary full-year results for 2020. And they’re quite promising. At least, I think so. With the vaccine rollout progressing quickly in the UK, travel restrictions are beginning to ease. And so it’s encouraging to see that advanced cruise bookings for 2021-23 are 20% higher compared to a year ago.

To me, this indicates that many over-50s (Saga’s primary customer age group) are eager to enjoy a long-overdue holiday. And given that the UK vaccine policy has prioritised over-50s, they’ll be able to do so safely. It’s worth noting that cruise travel bookings only represent a small portion of Saga’s revenue stream. But considering it was shedding customers not too long ago, I find this progress encouraging.

Its insurance business has also performed relatively well. After years of decline, the motor and home insurance segments finally began growing again, albeit by a small margin of 1.1%. While this is hardly substantial, it indicates the company might be improving the quality of its services, especially since customer retention rates have increased by 5.4% to 80.5% overall.

This report was well received by investors and so the Saga share price subsequently increased. While it’s too soon to tell, the new management team led by Sir Roger De Haan seems to be getting things back on track. Besides injecting £100m into the business, De Haan has restructured the company. This involved cutting the managerial layers down from 17 to five and reducing the employee count by 36%. Terminating employee contracts is never pleasant. But it has improved the operational efficiency of the firm and reduced losses by nearly 80%.

The challenges that lie ahead

The tough decisions made by new management are prudent in my eyes. But it has yet to fix all the problems created by the old management team, who openly admitted to being “overly focused on the short term”.

Saga still has an enormous pile of debt to contend with. As it stands, the company has over £820m of long-term obligations to repay. By comparison, based on Saga’s share price today, its market capitalisation stands at around £530m. Needless to say, it’s a highly leveraged business. And that creates a considerable level of solvency risk, especially since Saga is currently unprofitable.

The bottom line

The company has made some significant progress since the last time I looked at it, but there’s still a long way to go. And shareholder dividends will remain suspended for quite some time until debt levels are brought to a more sensible level.

But De Haan’s new strategy does sound viable to me and so far appears to be effective. With both the travel and insurance business divisions showing new-found growth, I believe this could be the start of a comeback for Saga. Therefore despite the high solvency risk, I think the Saga share price can continue to climb, and I would consider adding it to my portfolio.

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Zaven Boyrazian does not own shares in Saga. 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.

In hindsight, that call was bang on. When I penned that article, Saga’s share price was 17p. Today, it stands at just 10.5p. Hopefully, my article saved a few investors from losing money.

Given that Saga’s share price is now near all-time lows, I’m going to take another look at the investment case. Is the stock worth buying for a recovery, or do I think should you continue to avoid it?

Why has Saga’s share price tanked?

There are a few reasons Saga’s share price has fallen recently. One is that interim results were terrible. For the six months ended 31 July, the company posted a loss before tax of £55.5m. By contrast, in H1 2019, the group posted a profit before tax of £52.6m. Operating cash flow this time was -£23.2m, compared to £24.9m the year before. Meanwhile, adjusted net debt came in at £410.7m, up from £397.9m at 31 July 2019, resulting in a net debt-to-EBITDA ratio of 3.6.

Another reason Saga shares have fallen is that the company has raised money to bolster its financial position. Recently, it announced that it raised approximately £150m by issuing 972m shares. This will have diluted existing investors’ holdings. It’s worth pointing out that a large number of shares were bought by former CEO Sir Roger De Haan who is the son of the founder. As a result, De Haan – who has been appointed as Non-Executive Chairman – now owns about 26% of the company.

Turnaround plan

Looking ahead, Saga has plans to turn things around. According to the company, its new, strengthened management team has developed a “compelling turnaround strategy.” Saga says it has plans to create a “refreshed, contemporary and confident brand position” and to invest in data and digital to improve the customer experience. It says it is confident that this strategy will see the business return, in time, to sustainable growth and that it will restore significant value for shareholders.

This all sounds great, but let’s face it, the group is going to have its work cut out to turn things around.

For a start, the cruise side of the business faces enormous challenges due to Covid-19. Recently, Saga advised that most countries around the world are not accepting cruise ships and it does not see this changing for the remainder of this year. As a result, it has extended the suspension of its cruising operations until early next year.

Secondly, the group has to deal with its massive debt pile. Its aim is to get this down to a more manageable level. However, progress here is likely to depend on the pace of recovery from Covid-19. It’s worth noting that the group says that as a result of the debt, it is not expecting to pay dividends in the next few years.

My view on Saga shares

Saga may be able to recover from the current situation. However, a recovery is not guaranteed. A lot will depend on Covid-19.

Weighing everything up, I think the best move is to continue avoiding Saga shares.

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Over-50s specialist Saga (LSE: SAGA) was in freefall well before the stock market crash in March, and Covid-19 has made a bad situation worse. The group’s motor and home insurance business has held up pretty well, but its cruise and travel operations have been hammered.

Saga has just posted a punishing 51.4% fall in first half revenue to £192.4m, with profit before tax down 70% to £15.9m. The losses are mostly down to its travel business, which has been on hold since mid-March. Worryingly, it continues to burn through £6m-£8m a month. Saga hopes to resume travel operations from next April, but ultimately, that is not entirely in its hands.

UK shares are struggling

Like many UK shares, Saga’s problems could offer investors an opportunity. The strategic £100m investment by Sir Roger De Haan and planned £150m capital raise will help keep this ship afloat until better times. I’m impressed by customer loyalty, with 65% of customers retaining their cruise bookings. With the share price now trading at just 1.73 times earnings, Saga is cheap.

Management has a big job on its hands if it wants to turn this crate around. Saga is a strong brand but price-sensitive customers are not as loyal (to any company) these days. You won’t even get a dividend while you wait to see whether the group will succeed. Saga has a long way to go. I’m watching on the sidelines for now.

By contrast, Nottingham-based fantasy miniature figures specialist Games Workshop Group (LSE: GAW) is one of the best-performing UK shares right now. The Warhammer maker has proved adept at building loyal communities, and generating interest both online and through its physical stores. Investors have reaped the rewards.

I’d buy Games Workshop

Over the last five years, this has delivered astonishing share price growth of 1,623%. If you loaded up on its shares during the stock market crash, congratulations. They have now doubled in the last six months.

The Games Workshop share price jumped again last week after it reported sales totalling £90m in the three months to 30 August, up more than 15% from the same period last year. That is despite shop closures during the lockdown. The group also declared a dividend of 50p per share.

I am always wary of recommending UK shares after a fantastic run of success. Games Workshop isn’t cheap, trading at 46 times earnings. However, it is now looking to expand its world into video games, films and television. Its loyal customers are likely to follow.

If it manages that, Games Workshop could maintain its momentum. I’d put all my £2k into this, and skip Saga for now. 

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Harvey Jones 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.

Since that article, Saga’s share price has fallen from 59p to just 17p. That represents a decline of about 70%. Are Saga shares worth buying at today’s rock-bottom prices? Let’s take another look at the investment case.

Saga’s share price has tanked due to Covid-19

It’s not hard to see why Saga’s share price has tanked in 2020. As a result of Covid-19 lockdowns, the travel side of the business (which generates around 50% of revenues) has been decimated. Since mid-March, all of its cruise ship operations have been suspended. Recently, the company advised that as of 31 May, it had cancelled all travel departures up to and including August.

This setback is clearly going to hit near-term revenues and earnings quite badly. The magnitude of the impact is impossible to determine at the moment. However, Saga said in April that it expects revenue for the full year to be lower by around 65% for tour operations and cruise if the cruise business is suspended for six months.

Can Saga rebound?

Could the company turn things around now that lockdowns are easing? That’s hard to say due to the uncertainty associated with Covid-19.

In a trading update on 22 June, Saga said that it continues to expect “some travel to resume this year”. However, it added that it has considered various scenarios for the travel side of the business including one in which travel is not resumed until 2021.

My concern is in relation to future booking numbers. Saga recently said that it has retained over 70% of advance receipts on cancelled cruise departures. It also said new bookings for next year have been “very positive”. I am a little sceptical about near-term booking numbers, though. Given that Saga caters to the elderly segment of the population – who are more vulnerable to Covid-19 – my belief is that cruise ship passenger numbers won’t return to pre-Covid-19 levels for quite a while. This adds uncertainty to the investment case for Saga shares.

Saga’s dividend has been suspended

There are other issues that add uncertainty as well.

One is the group’s debt position. At 31 January, net debt totalled £594m. This could potentially present problems if operating conditions don’t improve soon.

Another is Saga’s dividend. In the past, Saga shares had appeal from an income perspective as the dividend yield was attractive. However, the dividend has now been suspended due to the challenges the company is facing. We don’t know when it will be reinstated.

Are Saga shares a good buy?

Weighing everything up, I think the best move for investors is to avoid Saga shares at the moment.

Given the uncertainty associated with Covid-19, the shares are too risky to buy right now, in my view.

All things considered, I think there are much safer stocks to buy.

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But I think the tide is turning for this business. As a result, I reckon now could be a good time for risk-tolerant investors to buy the Saga share price for its capital gains and income potential.

Transforming the business

Saga’s share price has taken a hit thanks to problems at the group’s insurance business. Management’s decision to try to overhaul this business a few years ago stumbled, and the firm has been trying to get back on its feet ever since.

Progress is slow, but according to chief executive Lance Batchelor, who is due to step down in January, the company is making “good progress” winning back customers with its revamped insurance offering, cruises and savings products aimed at the over-50s.

Saga is pursuing several initiatives that are designed to bring customers back to the brand. These include a new three-year fixed-price insurance product and luxury travel offering such as escorted tours and riving cruising. Not only will these offerings help the brand differentiate itself, but they could produce better profit margins as well.

Unfortunately, it will take some time for these initiatives to flow through to the bottom line. First-half profits fell from £110m to £53m compared with the same period last year, but City analysts are expecting a recovery for the full year.

Analysts have pencilled in earnings per share of 7.7p for fiscal 2020, that’s up from a loss in fiscal 2019.

Dividend cut

Before the company announced its first-half results in mid-September, the stock supported a dividend yield of around 8%.

However, management decided to cut its half-year dividend from 3p per share to 1.3p. Analysts are expecting a similar cut for the full-year payout. While disappointing, even after the dividend reductions, shares in Saga will still yield 4.6%, and the payout will be safer than it has been for some time. Based on current forecasts, this dividend will be covered around 3.5 times by earnings per share, giving plenty of headroom if earnings should fall further.

The low payout ratio also gives management more free cash to invest back into the business, a long-term positive in my view.

The bottom line

So overall, following Saga’s recent dividend reduction I think it could be time to buy shares in this over-50s travel and financial services specialist. The new, lower dividend looks safer than the old payout and, at the time of writing, the business is changing hands at around 6.5 times forward earnings.

This valuation gives a wide margin of safety if anything goes wrong. I will be watching the company closely over the next 12 to 24 months as it continues to invest in the turnaround plan. I think these efforts to refine its customer offering have tremendous long term potential.

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What a Saga!

Its strong brand, broad customer base and wealthy target demographic all seemed to bode well. The result? The Saga share price is down three quarters over five years. Although some argue it was hit too hard.

But there’s good news today with the stock up 12% after what would normally been seen as a rather underwhelming set of results. That’s the benefit of low expectations for you.

The £572m FTSE 250 group posted a 52.1% drop in pre-tax profits to £52.6m for the six months ended 31 July. Total net debt rose 64.3% to £642.9m, although primarily due to the additional £245m borrowed to fund the purchase of new cruise liner Spirit of Discovery.

Investors even seemed content to swallow a dividend cut, with the interim payout cut from 3p a share last year to just 1.3p.

Markets clearly expected much worse, with the group trading at a forward valuation of six times earnings. Today’s results included “good progress made in insurance and cruise,” with results in line with expectations. Full-year guidance for underlying profit before tax of between £105m and £120m remains unchanged.

Flexing their consumer muscles

The big problem Saga faces is that the over-50s are increasingly financially savvy, and prefer to shop around for the best deal on insurance and holidays rather than clinging to familiar names. Inevitably, Brexit is making them nervous and reluctant to spend, hitting its cruise and holidays businesses.

Saga responded in April with a “strategic reset” aimed at boosting customer retention across its home and motor products, including three-year price fixes. Saga has now reported good progress, with more than 175,000 three-year fixed price policies being sold since launch, while a higher proportion of customers are now coming to the company direct. 

It has also fully achieved cruise revenue targets for 2019/20, with forward bookings of more than 50% of the 2020/21 target, and capacity days increasing 28% next year.

Fresh spirit

Group CEO Lance Batchelor, who steps down in January, said Spirit of Discovery is now fully operational, “delighting customers, and delivering on our targets for filling additional cruise capacity into next year.” Saga’s membership programme is also boosting cross-selling opportunities, he added.

The group still faces plenty of challenges, particularly in its tour operations division, where underlying pre-tax profit halved, from £8.4m to £4.2m. That’s a result of “fewer passengers and a high level of discounting across the industry,” although forward looking visibility suggests this won’t continue in the second half of the year.

In July, GA Chester said it wasn’t too late to buy the soaring Saga share price, but that’s slightly less true after today’s massive jump. This underlines the importance of getting in early if you really want to benefit from recovery stocks.

Saga appears to be setting the right course but still faces a long journey in choppy waters. However, a forecast yield of 8.7%, covered 1.9 times, should smooth your passage.

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That was back in July. Since then, shares in the group, which is best known for its range of holidays and financial products aimed at the over 50s, have drifted sideways.

Activist investor

The most significant development since I last covered the company is the involvement of activist hedge fund Elliott Capital Advisors.

Only a few days after my last article on Saga, the hedge fund announced it had taken a 5.1% stake in the business. Elliott has a history of building positions in troubled companies and then pushing management to break up or sell, generating enormous profits for shareholders in the process.

So far, the firm hasn’t revealed its intentions at the specialist insurance and travel business. However, just having the hedge fund on the shareholder roster could be enough to push management to make some substantial changes.

Trying turnaround

Elliott’s involvement comes at a tough time for Saga. Not only is the company trying to restore its reputation, but it’s also looking for a new CEO.

Lance Batchelor, who has been with the business since just before its initial public offering in May 2014, announced he is planning to step down in January. Whoever steps into his shoes will be responsible for executing the turnaround strategy and, more importantly, will be accountable if any further problems emerge.

As it stands, City analysts are expecting big things from the company over the next 12-24 months. Analysts have pencilled in earnings growth of 102% to 7.6p for 2019, which puts the stock on a forward P/E of 5.7. They’re expecting further earnings growth of 7.7% in fiscal 2021.

If the company meets these forecasts, I see no reason why the stock cannot double from current levels. The rest of the insurance industry is trading at a forward P/E of around 11. This implies shares in Saga are substantially undervalued at current levels.

Risk vs reward

It seems to me that the main reason why the market is placing such a low valuation on the Saga share price is a lack of trust in management. The company needs to prove to the market it can return to growth. The only way to do this is to put up the numbers.

That could be why Elliott has decided to take a position now. If the company does execute a successful turnaround, they stand to make a bundle. If not, the hedge fund owns enough of the business to push for change at the top.

Considering all of the above, I think it could be an excellent time to buy the Saga share price right now. Investors could see an upside of more than 100% from current levels if the company returns to growth. And if it doesn’t, Elliott will push for change. Either of these scenarios will lead to attractive returns for investors, in my opinion.

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Today, I’m going to give my views on the valuation and prospects of National Express (LSE: NEX), which released its half-year results today, and over-50s specialist firm Saga (LSE: SAGA). While the latter is officially in the insurance sector, travel is actually its largest segment by revenue.

Express delivery

Moving people from A to B can be quite a lucrative business, if executed well. National Express has been doing it in the UK for years, but increasingly has also tapped into targeted high-growth markets abroad.

The company today reported another set of record results. It said the performance was “primarily driven by organic revenue, profit and margin growth in every division,” and added, “we are currently trading ahead of expectations.”

Group revenue increased 10.5% (7.8% at constant currency), with earnings per share rising 12.7%. The board lifted the interim dividend 10%, continuing the company’s record of strong payout growth.

In early trading, the shares jumped as much as 6% to a new multi-year high of 450p, but have come off a little and are changing hands at 438p, as I’m writing. At this price, City analysts’ full-year forecasts put the stock on a price-to-earnings (P/E) ratio of 12.6, with a prospective dividend yield of 3.7%.

I think this represents good value for a company whose prospects for continuing growth appear excellent. I’d happily buy the stock today.

Quite a saga

I looked at Saga exactly a month ago when its shares were trading a whisker above 33p — a far cry from its 2014 stock market flotation price of 185p. I thought 33p was good value, and wrote: “Because the stock is so cheap, I also see potential for a bid from private equity or for activist investors to come in and push for a break-up of the group. I think this may limit further downside for the shares.”

Well blow me down, not only did 33p prove to be a floor, but also an activist investor arrived on the shareholder register last week. Elliott Capital Advisors, which previously agitated for Whitbread to break up Premier Inn and Costa Coffee, disclosed a 5.1% stake in Saga. Bloomberg reported Elliott wants Saga “to explore options to boost returns for shareholders, including potentially separating its insurance and cruise businesses.”

The share price had started to head north before Elliot came on the scene, but it’s risen higher since. The question now is whether, after soaring 50% to 49.5p in the space of just a month, the stock currently offers good value for investors.

The margin of safety to allow for any earnings disappointment isn’t as high as it was a month ago, but a forward P/E of 6.6 remains attractive, in my opinion. Also, with it targeting a 50% payout ratio for the dividend, a prospective yield of 7.6% could bear quite a substantial downgrade and still be generous.

All of this without even considering potential value-enhancing break-up options. Personally, I continue to rate the stock a ‘buy’.

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However, during the past two weeks, Saga has staged a slight come back. After printing an all-time low of 33p in mid-June, the stock has since rebounded by more than 20% and is currently dealing for just under 40p per share.

I think there’s a good chance this rally could continue, and eventually take the stock back up to where it was at the beginning of this year, above 100p, although that’s a long term target. In the near term, I think a more conservative goal of 60p-80p might be more accomplishable.

It all comes down to valuation

Over the past 12 months, as Saga has issued a string of dire trading updates, confidence in the business has evaporated. As a result, even though City analysts expect the company to report earnings of 7.5p share for its current financial year, the market doesn’t seem to trust this forecast.

A stock’s valuation gives us a lot of insight into what the market thinks about a company and Saga’s P/E of just 5.3 seems to suggest investors have almost no confidence in the business and its management. 

I’m not willing to give the company the benefit of the doubt just yet, but I do think there are some signs management’s efforts to stabilise the business are starting to work. As I noted the last time I covered the company, Saga’s insurance business, which has been the group’s problem child for the past two years, seems to be on the road to recovery. Meanwhile, there appears to be a robust demand from travellers for Saga’s new cruise offering. 

Granted, the company isn’t out of the woods just yet, but management seems to think the business has stabilised. If this trend continues throughout the rest of the year, I think there’s a good chance the market could re-rate the stock as Saga’s outlook improves, and its future becomes easier to determine.

The market dislikes uncertainty more than anything else, and the Saga share price has been shrouded in uncertainty for much of the past two years. If the company continues to report positive trading, the shroud of uncertainty should lift, and investors are likely to return. 

Double in value

As confidence in the business returns, I think the Saga share price could double in value. Historically, the stock has traded at a P/E of between 8 and 15, substantially above where it is today. 

I reckon even a modest improvement in the group’s fortunes could justify a P/E ratio in the high-single to low-double-digit range, giving a potential upside of 100% or more for investors who are willing to take the risk today. On top of this, the stock also supports a dividend yield of 10% at the time of writing.

So, if your’e looking for a company that has the potential to double your money, it might be worth taking a closer look at the Saga share price.

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Here, I’ll discuss their turnaround prospects and give my view on whether they’re now bargains of the year, or stocks to avoid like the plague.

Back to heritage

Floated on the stock market at 185p in 2014, Saga has slumped over the last 18 months to little more than 33p (market-cap £370m). It was formally demoted from the mid-cap FTSE 250 index to the FTSE SmallCap index yesterday.

The key to Saga’s future success rests on overcoming the challenges it faces from the commoditisation of the markets in which it operates, especially in insurance. Outgoing chief executive Lance Batchelor set out a fundamental change to the group’s strategy earlier this year: “To return the whole business to its heritage as an organisation that offers differentiated products and services.”

I think this is the right approach. It is, of course, early days. But there were encouraging signs of progress in the company’s trading update at last week’s AGM, where management also confirmed the company was trading “broadly in line with expectations.” 

City consensus forecasts put the stock on a price-to-earnings ratio of just 4.4 with a prospective dividend yield of 11.4%. This looks good value to me for a potentially high-reward turnaround proposition.

And because the stock is so cheap, I also see potential for a bid from private equity or for activist investors to come in and push for a break-up of the group. I think this may limit further downside for the shares. As such, I’m inclined to rate Saga a ‘buy’ at the current level.

Missed a beat

Gear4music floated on AIM at 139p in 2015 and reached a high of over 850p in autumn 2017. The shares had already retreated to nearer 500p, before plunging 50% on a profit warning in January this year. Annual results this morning saw the price fall as much as 16%. But it’s since regained some ground, trading 8% down on the day at 212.5p (market-cap £45m), as I’m writing.

Gear4music hasn’t had the fundamental identity crisis suffered by Saga. Instead, what we’ve seen is something rather common with young, fast-growing companies. An excited market pushing the valuation of the stock up to a grossly over-exuberant level, followed by a crash when the company stumbles operationally due to its galloping growth.

In today’s results, the company said it’s confident the actions it’s taking will address the operational issues that impacted profitability last year. These issues included insufficient capacity at its York distribution centre over the peak Christmas trading period, resulting in margin-sapping, higher-than-anticipated labour and distribution costs.

While the company also noted today a “challenging retail environment,” and that “the on-going Brexit uncertainty and its impact on consumer confidence is unhelpful,” the question for investors is whether the market has overdone it in hammering down the company’s shares to the extent it has.

A valuation of less than 0.3 times forecast sales suggests so to me, and I rate the stock a ‘buy’.

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