Shares in over-50s insurance and travel company Saga (LSE: SAGA) have continued to trend lower recently. When I last covered the stock, in November, the SAGA share price was near 275p. Today, however, it’s at 253p.
Here, I’m going to look at whether the stock offers value after its recent share price fall. I’ll also discuss whether I’d buy Saga shares for my portfolio today.
Saga shares look cheap
Looking at the investment case for Saga shares right now, I do see some value on the table. I say this because, with analysts expecting the group to generate earnings per share of 43.7p for the year ending 31 January 2023 (versus a loss of 11.1p the year before), the stock is trading on a forward-looking price-to-earnings (P/E) ratio of just 5.8.
That seems low to me. At that valuation, Saga is being priced as if it’s set to go out of business. I don’t think that’s a likely scenario though. Yes, it does have quite a bit of debt on its books (about £730m at the end of January). However, in its full-year results for the year ended 31 January 2022, the company advised that it had a strong liquidity position with available cash of £187m and a £100m undrawn revolving credit facility. So, it should be able to service its debt in the short term.
Risks to the share price
Having said that, I think it could take some time for Saga’s share price to recover.
One major issue for the group right now is that it doesn’t have much momentum in its travel business. Recently, it advised that its tour bookings for 2022/23 were £132m – about 30% below pre-pandemic levels. It added that the crisis in Ukraine may also reduce travel bookings in the short term. This is not ideal, as the travel side of the business has brought in a decent chunk of the company’s profits in the past.
A second is that regulatory changes are set to reduce its motor and home insurance profits in the near term. Recently, the Financial Conduct Authority (FCA) introduced new rules to stop insurance companies like Saga charging existing customers more than new customers. This is a setback for the group. However, it believes the drop in profitability should reduce over time.
A third issue here is that City analysts are currently reducing their earnings estimates for this financial year and next. Over the last month, the earnings per share forecast for FY2023 has fallen by 2.2p. Downward revisions can put pressure on a company’s share price. So, this broker activity could limit upside here in the near term. It’s worth noting that the company didn’t provide any guidance for earnings this year due to the “continued uncertainty arising from Covid-19.”
Saga: my move now
As for whether I’d buy Saga shares today, the answer to that is no.
I do think the stock looks cheap right now. However, I prefer to invest in businesses that have a little more momentum.