Experienced Fools will know that the best time to buy into a company is often when its shares are (temporarily) hated. With this in mind, should investors be flocking to, rather than avoiding, travel and insurance firm Saga (LSE: SAGA) — one of last year’s major stock market losers?
Too cheap
Let’s recap. A largely uneventful 2017 ended on an extremely disappointing note for owners of the Folkestone-based company, which specialises in providing services to the over 50s.
In December, it issued a profit warning stating that earnings had been impacted by “more challenging trading in insurance broking” and the demise of airline Monarch in October. The latter — which saw holidays cancelled for 860,000 people — resulted in a one-off cost of £2m for the company.
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As a result of these issues, Saga revealed that underlying pre-tax profit growth for the full year would be between 1% and 2% — substantially lower than the 5% achieved in H1. In addition to this, the business warned that planned investment to attract new customers would mean underlying profits in the new financial year are likely to fall by roughly 5%.
Unsurprisingly, shares tanked on the news, ending the year at 126p — 30% below their price when Saga joined the market back in 2014.
Despite all this, I think the stock warrants attention.
Today, the company announced a management shake-up, including the appointment of a chief executive (Robin Shaw) to oversee Saga Travel — a new division created following the company’s decision to combine its cruise and tour operations. According to CEO Lance Batchelor, the reshuffle will provide the business with a “more focused executive team” as it targets growth in its customer base.
Then there’s the valuation. Changing hands at just 9 times earnings, Saga shares appear firmly in bargain territory. The investment case becomes even better — particularly for those seeking income — when it’s considered that payment of its stonking 7.1% dividend yield will not, if its aforementioned CEO is to be believed, be affected by recent poor trading.
So long as Saga succeeds in attracting a sufficient number of new customers in 2018, I see no reason why the shares can’t recover strongly this year. It’s a buy for me.
In need of assistance
Of course, Saga wasn’t the only mid-cap that ran into difficulty in 2017.
I warned Foolish readers that shares in breakdown specialist AA (LSE: AA) could have further to fall back in March. So proved to be the case. By the end of the year, the stock had shed another 35% in value. When you consider that markets have been generally buoyant over the last 12 months, that kind of drop can’t have been easy for holders to swallow.
Following its annus horribilis, shares in the £1bn cap now trade on just 7 times earnings based on EPS estimates of 23p for the next financial year (beginning February 1). When AA’s consistently high operating margins and returns on investment are taken into account, that looks seriously cheap. There’s also a 5.1% yield on offer to all those who dare to get involved.
The biggest snag in the investment case for the Basingstoke-based business, however, remains the huge amount of debt on its books. So while the payouts may look tempting, I’d be looking for evidence that the company is continuing to address this burden before daring to go near the stock.
