So what’s going on here? And has this big share price fall presented a buying opportunity for me?

Why Saga’s share price has tanked

The reason Saga shares are down heavily today is that the company has posted a profit warning.

In its half-year results for the period ended 31 July, Saga said it now expects to generate an underlying pre-tax profit of £20m-£30m this financial year. Previously, it was expecting profit of £35m-£50m.

The company blamed high levels of inflation in its insurance unit (claims inflation of 13%) for the drop in profitability. “Trading conditions in the UK insurance market continue to be challenging,” said chief executive Officer Euan Sutherland. It added it expects the high levels of claims inflation to continue in the near term.

Not all bad news

It’s worth noting that there were some positives in the half-year results. For example, the company returned to profit after posting losses during the pandemic. For the period, underlying profit before tax amounted to £14m versus a loss of £2.8m a year earlier.

Meanwhile, the company said that its cruise segment is doing quite well and on track to achieve its targets for this year and next.

The group also has big plans for the future. “Looking ahead, while we are mindful that the external environment remains challenging, we are confident that Saga is now in a stronger position than it was before the pandemic. We are determined to build Saga into the largest and fastest-growing commercial network for older people in the UK, building a customer lifetime value model and creating long-term value for our investors,” said Sutherland.

However, these positives were ultimately overshadowed by the profit warning. In the current environment, investors have very little tolerance for lower-than-expected guidance.

Are Saga shares worth buying?

So would I buy Saga shares today after the big drop? The answer to that question is no. I think the stock could potentially see a rebound at some point if business conditions get better and profitability improves. After all, it has taken a massive hit recently.

But there are few things that turn me off here. One is the number of profit warnings in recent years – there have been quite a few. I’d want to see Saga put together a decent track record in terms of profitability before investing.

Another issue for me is the debt on the balance sheet. At 31 July, net debt was £721m. That’s high. Having said that, the company does own two new cruise ships that have a combined book value of around £612m, so it does have some protection here.

A third issue is the lack of dividend. If I was to invest in an insurer, I would want regular dividends.

Given these issues, I’m happy to leave Saga shares on my watchlist for now.

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.

And I think we have now seen a low for the stock.

As the company pushes ahead with the reopening of its cruise business and capitalises on increasing demand for financial services, I think its earnings will steadily increase over the next couple of years.

Saga share price outlook

A quick glance at City expectations for the company’s growth over the next few years seems to support my conclusion. Analysts believe the corporation will report earnings growth of more than £80m in the 2023 financial year. Analysts also expect the group to report a loss of £16m in 2022 and then a profit of £66m in 2023.

Based on these numbers, the stock is trading at a 2023 price-to-earnings (P/E) multiple of 5.4. That looks cheap compared to the rest of the market, which is dealing at an average P/E multiple of around 14.

These figures imply the stock could be worth three times more than its current value in the best-case scenario. However, these numbers are just estimates at this stage. The outlook for the global economy is incredibly uncertain.

There is no guarantee the company will be able to hit these earnings forecasts. If there are additional pandemic restrictions in the cruise industry over the next couple of months or if there is a significant deterioration in the global financial environment, the organisation may have to reconsider its growth plans. These are some of the most significant risks the enterprise faces today.

Moving forward

But I am confident that this Saga share price has bottomed despite these risks. Over the past two years, the company has significantly improved the state of its balance sheet. It has paid down debt and raised cash to meet upcoming obligations.

At the same time, management has restructured the business to reduce costs and increased the company’s focus on more profitable business lines. These should help the business overcome any near-term challenges, particularly regarding competitive forces in the financial services market.

The business has streamlined and refined its financial offer. These changes are already proving popular with customers.

Put simply, the company is in a much stronger position today than it was two years ago. That is why I believe the Saga share price has bottomed, despite growing risks in the global economy.

As such, I would be happy to buy the stock as an undervalued recovery play for my portfolio over the next few years. As the group pushes forward with its growth ambitions, I think the shares could rise significantly from current levels.

I think this could be a sign of things to come. With the outlook for the company improving, I believe the stock could hit 400p or more by the end of the year. 

Earnings growth 

Over the past couple of years, Saga has faced numerous headwinds that have held the group back. Instability as its insurance business and the pandemic caused years of disruption for the enterprise. 

As the world starts to open up again, the outlook for the company’s cruise division is improving. At the same time, its financial services arm is still registering relatively attractive growth rates. 

According to the company’s latest trading update, published at the end of January, the number of policies sold by its insurance business increased 1% in the period from the beginning of August to the end of January.

At the same time, its cruise arm generated positive earnings before interest, tax, depreciation and amortisation (EBITDA) in the second half.

These figures appear to show a significant change in direction for the company. It seems to be moving on from its past problems, which could drive a substantial re-rating of the stock in the months ahead. 

That being said, I cannot ignore the geopolitical and economic risks that continue to dominate news flow at the moment. These challenges could impact demand for the company’s services, especially if inflation continues to eat away at the purchasing power of UK consumers. This challenge is something I will be keeping an eye on as we advance. 

Saga share price opportunity

Despite these potential headwinds, I think the stock looks undervalued at current levels.

According to current City analyst projections, the shares are selling at a 2023 price-to-earnings (P/E) ratio of 5.5. That is compared to the market average of around 14. 

These figures seem to suggest that the stock could double in value from current levels. I think that is a tad optimistic, even though in the past, the stock has commanded a P/E of around 8. If the shares can return to this value, the Saga share price could be worth as much as 400p. That suggests a potential increase of 43% from current levels. 

As such, I would be happy to buy this stock for my portfolio as an undervalued growth play. Even though the business might face a couple of challenges in the next few months, I think earnings growth could push the stock higher as investors buy into the recovery story. There is also the potential for the enterprise to reintroduce its dividend.

So why has Saga’s share price tanked over the last few months? And has the fall created a buying opportunity for me?

Why Saga’s share price has fallen

In my view, there are a few reasons Saga’s share price has fallen. One is concerns over Covid-19. Recently, we’ve seen a spike in cases across Europe and, as a result, a number of countries have reintroduced lockdown measures.

This has impacted sentiment towards travel stocks. Just look at the share prices of Carnival, easyJet, and IAG – all have taken a hit recently.

Another issue is that the group’s H1 results for the six months to 31 July, posted in September, were a little underwhelming in some areas. On the retail broking side of the business, for example, the group only delivered 0.5% growth in motor and home policies sold. Perhaps investors were looking for a higher level of growth here. It’s worth noting that last year’s full-year results showed growth of 1.1% in this segment.

A third issue is broker price target cuts. Last month, analysts at Credit Suisse cut their Saga share price target to 423p from 471p. This kind of negative broker activity can impact a company’s share price.

Finally, it seems the market did not like the terms of a recent bond deal. Back in late June, Saga said it would be issuing a £250m fixed-rate bond at an interest rate of 5.5%. After the details of the bond deal were announced, the share price fell significantly.

Should I buy Saga shares today?

Looking at Saga shares today, they do look interesting from a value investing point of view, in my opinion.

At present, the consensus earnings per share forecast for next year (ending 31 January 2023) is 60.7p. That means at the current share price of 275p, the forward-looking P/E ratio is just 4.5. That seems very low. If business performance picks up, that valuation could turn out to be a bargain.

One person who clearly sees value here is chairman Sir Roger De Haan. Regulatory filings show that on 16 November, De Haan purchased 341,415 Saga shares at a price of 293p per share. This trade cost the insider just over £1m. I see this director dealing activity as quite bullish. It suggests the chairman is confident about the future and that he expects the share price to rise from here. 

However, one issue I personally have is profitability. I like to invest in companies that are highly profitable. Diageo and Microsoft are examples of very profitable companies. These kinds of companies can reinvest their profits and generate further growth, taking advantage of the power of compounding.

Traditionally, Saga has not been very profitable. Even before Covid-19, its return on capital employed was very low.

Given the weak earnings level here, I’m going to keep Saga shares on my watchlist for now. I think there are better opportunities in the stock market for me today.

The Saga share price activity

Saga focuses on providing products and services for the over-50s market. Its operations include package holidays and tours across the globe. It is often best known for its insurance products. These include motor, home, travel, pet, private medical, and life insurance. It also provides a host of different financial services products.

As I write, the Saga share price is trading for 316p. This time last year, shares were trading for 152p per share, which is an impressive 107% return. Despite this impressive 12-month period, the shares have been on a downward trajectory for some time. Prior to the market crash in February 2020, shares were trading for more than 600p per share. If I go back to February 2019 levels, shares were trading for over 1,800p per share.

So what caused the Saga share price to tumble? At the end of 2018, it emerged that customer numbers were dwindling and fast for the well-known brand. The announcement of a £310m non-cash impairment charge compounded things further. Debt began to pile up and there were real fears bankruptcy might be on the horizon. 

On the road to recovery?

CEO Lance Batchelor left his position as Saga’s CEO in January 2020. A new management team were eager to right the wrongs of recent times but Covid-19 put paid to this as everything came to a halt. Saga recorded a record loss of £313m in 2020.

With the reopening of the economy, could Saga begin to recover and will the Saga share price rise? Well, last month’s announcement of interim results for 2021 showed glimpses of a potential recovery to me. The results covered a period for six months to 31 July 2021. Saga recorded a profit of £0.7m compared to losses of £55m in the same period last year. Cash flow increased substantially, which is a bonus too.

Saga’s new management decided that recovery required restructuring, which requires capital. In the longer term this could boost the Saga share price. Unfortunately, debt levels are higher than before as it borrowed more for this restructure and to keep the lights on and give it some breathing space. The second aspect is it needs revenue to come in to avoid further issues down the road. For example, with cruise ships opening up once more, it will hope to capitalise on pent-up demand and record some positive results and bring in some money to pay off the debt accrued.

Risks and verdict

Saga cannot afford further restrictions or lockdowns linked to the pandemic. This could see its performance affected badly like last year. If this were to happen, any recovery may not materialise. Linked to this, its debt level is concerning and is very high just now for my liking. It could take several years to pay this off.

Overall, I am not convinced of Saga’s recovery prospects right now. The recent Saga share price spike doesn’t offer me any confidence in its investment viability. Right now, I will avoid shares for my portfolio.

However, after a prolonged period of decline since 2017, it seems the stock is finally on the road to recovery. In fact, over the last 12 months alone, the Saga share price has nearly doubled. But can this upward momentum continue and is it a buy for me? Let’s take a look.

Saga results

Last week, the firm released its interim report for 2021. And at first glance, it looks relatively mediocre. This could explain why the Saga share price didn’t really move much on the news. However, there are some continued signs of recovery.

Starting with the less-than-attractive numbers, revenue from its travel segment fell by just under 80% compared to a year ago. This isn’t too surprising given most of its ships have been parked in-harbour these last six months. But with cruise operations restarting on 27 June, I expect this revenue stream to improve drastically in the second half of 2021.

On the insurance side of things, performance has been more pleasant. The number of policies sold increased by 0.5% to 835,000. That’s obviously not a staggeringly impressive growth rate. However, considering Saga was shedding insurance customers not too long ago, it’s an encouraging sight. Even more so, given retention rates also continued to climb and now sit at 80.6%. Meanwhile, the profit margins per insurance customer also rose by 7%, from £71 in 2020 to £76 this year.

All of this progress combined has resulted in the new management team just scraping itself back into the black. Profits before taxes came in at £0.7m versus a £55.5m loss last year. That’s a significant improvement. But there remains a long road ahead for Saga and its share price.

The challenges yet to come

The capital and operational restructuring that Saga underwent has obviously improved the firm’s prospects. But one of the glaring issues with this business is its debt. As of the end of July this year, the total for outstanding loans was at £899m. That’s actually 30% higher than a year ago.

This surge in borrowing activity comes on the back of issuing a new £250m unsecured senior fixed-rate bond. The proceeds have been used to repay a £70m covenanted term loan and improve liquidity. In other words, management has given itself some breathing space on its short-term obligations. However, if revenues don’t start rising again, this new loan could amplify problems further down the line. And, in turn, adversely impact the Saga share price.

Final thoughts

These latest results were far from perfect. But a return to profitability along with a clear path of revenue recovery is encouraging, in my opinion. Personally, I think the Saga share price is capable of returning to its 2017 levels. But it’s not going to happen in 2021 as this will likely be a multi-year journey. I won’t be buying for now.

Placing a value on the Saga share price

To try and determine how much the company could be worth, I first need to consider its potential. Over the past 18 months, the over 50s travel and finance specialist has been to the brink and back.

Luckily, after substantial refinancing and a management clear out, it’s now back on a stable footing. But that doesn’t mean the group is out of the woods just yet.

As long as coronavirus continues to circle the population, there’ll be a threat to the group’s business model. Another significant outbreak of the virus could cause it to postpone cruises, which have only just restarted.

That said, the company is in a much stronger position today than it was this time last year. Indeed, at that point, the company was struggling to find financiers that would loan it money to maintain operations.

The environment has changed so much since then that it was able to issue £250m of bonds at an interest rate of 5.5% at the end of June. The proceeds of the issue have been used to pay off more expensive forms of debt and provide working capital. 

At the same time, the company has been able to restart its cruise operations, bringing some much-needed cash flow into the operation.

Back to profit 

All of the above suggests the company is on track to move back into profit within the next year or two. That makes it easier for me to place a value on the Saga share price.

Based on the company’s own projections, City analysts reckon it will report earnings per share of around 15p for its current financial year. Earnings could rise to 59p by fiscal 2023. These are just estimates at this stage and are subject to revisions. Nevertheless, I think they show the stock’s potential. 

Based on these estimates, the average City analyst price target for the stock is 515p. 

However, I think investors should take these projections with a pinch of salt. After all, the company’s recovery isn’t guaranteed, especially considering the fact that coronavirus is still a very real and present threat. More lockdowns could make these projections completely redundant. 

Still, in the best-case scenario, where the company returns to growth in the next two years, I think the Saga share price could head higher. The market may be happy to pay more for the stock as the outlook for the cruise industry improves. 

As such, I think the stock could still be undervalued if the economy continues to recover. That’s why I’d buy the shares for my portfolio today. 

However, over the past 12 months, shares in the over-50s travel and finance specialist are up a sterling 73%.

Over the past year, I’ve repeatedly said Saga’s reputation and diversification will help it navigate the crisis and provide solid foundations for the group to stage a recovery after the crisis. I continue to believe this is the case. That’s why I’d be tempted to buy Saga for my portfolio today. 

Saga share price outlook

However, I’m also well aware that trying to predict the stock’s near-term movements is impossible. And there’s no telling how the stock will perform over the next few weeks, months, or even years. That said, in theory, a stock price should track the performance of the underlying business in the long run. 

Therefore, if Saga’s sales and earnings start to recover from their pandemic slump during the next few quarters, the stock should also achieve a positive performance. 

And it looks as if the company’s outlook is improving. Towards the end of June, Saga Cruises resumed sailings for the first time since the pandemic began in March 2020.

In a trading update published ahead of its annual general meeting in mid-June, the company noted that cruise load factors for its current financial year were around 77%. Meanwhile, other booking numbers were ahead of expectations, it noted. 

A load factor of 77% might not seem that impressive, but considering the industry has been in shutdown for over a year, it’s a drastic improvement. Indeed, in the buildup to reopening, the Saga share price outperformed the market.

It seems the group’s first cruises of the year have gone to plan. A slate of voyages is scheduled for August, and if these perform without a hitch, I think the company is likely to return to growth this year. 

Growth ahead

Considering all of the above, I think Saga is on track to return to growth in 2021. This could translate into a higher share price as investor confidence in the business returns. 

That said, the company’s growth isn’t guaranteed. Another virus wave could really set back reopening plans. And this would almost certainly harm the Saga share price. 

Further, it could be two or three years before the company can achieve full capacity on its cruise ships. In the meantime, earnings will continue to remain depressed. 

Despite these risks and challenges, I think the stock offers an attractive risk/reward profile today. That’s why I would buy it for my portfolio as a recovery play.

Is GlaxoSmithKline becoming a growth stock?

For many years, GlaxoSmithKline (LSE:GSK) hasn’t been a particularly stellar performer. Looking over the past decade, the GSK share price has increased by a grand total of 7%. Total shareholder returns have obviously been much higher thanks to its sizable dividends. But under the new leadership of CEO Emma Walmsley, the company is now undergoing a massive transformation in which dividends are expected to suffer.

The plan is to spin out its consumer healthcare division into its own entity in 2022. The remaining business will be focused entirely on the development of vaccines and new medicines. And given that such products can be highly profitable, the management team expects to achieve a 5% compound annual growth rate.

If successful, total sales are expected to reach £33bn by 2031. That’s a 37% increase compared to what its pharmaceutical and vaccine divisions generated in 2020. Today the company has a market capitalisation of around £72bn. So, taking this forecast, the stock looks exceptionally cheap in my eyes. However, there are some major risks involved in becoming a pureplay drug developer. The main one being a clinical trial failure. In the end, all it takes is one phase III trial to fail to make a multi-billion-pound investment go down the drain. But given Glaxo’s track record and experience, I think this risk may be worth taking. That’s why it’s on the list of best stocks to buy this July for my portfolio.

A new Saga?

Saga (LSE:SAGA) is another business currently undergoing transformation. After years of mismanagement, the company’s original owner decided to make a comeback and turn the ship around. As the board’s new chairman, Sir Roger De Haan revamped the management team and has swiftly begun restructuring the entire business.

While unpleasant for many now-ex-employees, this process seems to have saved the company from the brink of bankruptcy. Total losses have been cut by 80%, its cruise line travel division has seen 20% growth in bookings, and Saga’s long-time underperforming insurance business finally saw some improvement. It’s quite an impressive turnaround, in my opinion. And with the rapid progress of the vaccine rollout easing travel restrictions, this growth might continue throughout the rest of 2021. That’s why it’s on my portfolio’s best stocks to buy list this month. But it’s hardly going to be smooth sailing from here.

As promising as its progress is, there remain some significant issues with the balance sheet. Currently, the business has around £823m of debt to contend with and not much cash available. It did recently complete a tender offer that raised £100m of capital. But this was far less than the anticipated £250m. Needless to say, if Saga is unable to bring its debts under control over the long term, it could be the end of its turnaround story.