Saga (LSE: SAGA) has been a big beneficiary of this week’s rebound in leisure stocks. The Saga share price is one of Wednesday’s winners, with a massive 50% gain by noon.
The shares are still more 50% down since the start of 2020, but recoveries rarely start off better then this. If we’re really looking at a genuine recovery, that is. I am bullish about the FTSE 100‘s prospects for recovery in the medium term. But I do think there’s a very real chance of a double-dip stock market crash before that happens.
Still, in my experience, shares that are badly depressed by a crisis almost always recover. And it’s often relatively quickly. That leaves me puzzling a little over why people sell out during a crunch, when history unambiguously shows that’s the wrong thing to do.
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Saga share price
Well, it’s not always necessarily the wrong thing. Hanging on to shares in a company that’s at risk of going bust can be a bad move. But then, I’d say buying such shares in the first place is the real mistake. And with the Saga share price falling 45% this year at its worst, many investors must have seen a risk of bankruptcy there.
The firm has shown a net debt to EBITDA ratio that I would often consider a little disturbing. But at year-end, the company was facing only £109m of short-term net bank debt. I think that should be easily serviceable without any risk of a liquidity crisis.
Demand improving
Saga had been facing problems with falling demand in its targeted market of over-50s travel. It attempted to address it by further expansion into the cruise market, but then the Covid-19 blow struck. Still, the company has reported that customers have already booked 81% of its cruise capacity from September onwards. And of those who had cruises cancelled, more than half have already rebooked. I see that as positive for the long-term progress of the Saga share price.
Tough year
The current year looks sure to be a dreadful one, but forecasts still indicate a profit. And that’s something many of today’s strugglers won’t manage. Judging by the current consensus, we’re looking at a price-to-earnings ratio of only a little over 7. And if the forecast rebound in profit in the 2021–22 year comes off, it would drop that multiple to under 4.
I think that suggests the Saga share price is at a level where the company is expected to go bust. And I just don’t see any real chance of that happening.
Dividend
The firm’s dividend has been a disappointment in the past couple of years. Saga slashed it by more than half in 2019, and then suspended it entirely this year in response to the Covid-19 crisis. Analysts expect a small dividend in 2020–21, but I can’t help wondering if that might be a mistake. I’d rather wait and see the company fully back on its feet and looking at growing earnings. Like the Saga share price itself, I look at dividends with a long-term view.
I’ve been cautious about Saga in the past, but I do think I’m seeing a buy now.
