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Tempted by the Saga share price? Here’s what you need to know

Published 23/09/2019, 08:38
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It’s been a painful fall from grace for over-50s insurance and travel-firm Saga (LON:SAGAG), whose shares have fallen by 75% in two years.

But Saga shares rose by 12% last week after the firm published its half-year results. Are things improving? I’ve been taking a closer look to find out whether it’s time to start taking an interest in this battered business

Problem solved? Last week’s half-year results didn’t contain any nasty surprises and repeated previous guidance for full-year profits. That’s why the shares rose. Investor confidence in Saga is so low that simply delivering on guidance was enough to give the shares a big lift.

Drilling down into the business, the group’s membership scheme appears to be working well as a marketing channel for its cruise business and other marketing offers.

However, it’s insurance that generates the majority of the group’s profits. The picture here is a little more mixed, in my view. Sales of Saga’s new three-year fixed price home and motor insurance product appear to be going well and attracting more direct customers.

Direct sales should be good for profit margins as long as marketing costs remain under control. The alternative is to make more sales through price comparison websites. These tend to have lower profit margins, due to the highly competitive nature of price comparison.

Should you buy or sell Saga? My main worry with this business is that future generations of over-50s won’t want to be pigeonholed by their age. They will also be savvy online shoppers who are quite happy to use price comparison sites to find cheaper deals.

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It’s too soon to say whether Saga can maintain its niche role in the market — or adapt to offer a wider range of services.

My sums suggest that Saga shares are now trading on 6.6 times forecast earnings, with a dividend yield of about 7%. If the firm can deliver a reliable performance this year — and next year — this could be a bargain.

I’m not yet ready to buy. But if you feel confident about the business, I think the shares could be worth a look.

Is this stylish name a better choice? Another well-known name that’s fallen on hard times recently is fashion retailer Ted Baker (LSE: LON:TED).

The firm’s founder Ray Kelvin left after allegations about his conduct. The company has since warned about difficult trading conditions on a number of occasions. Analysts have cut their earnings forecasts for the current year by nearly 40% over the last 12 months.

A contrarian buy? Many retailers are finding life difficult at the moment. But very few have such a strong brand and profitable track record as Ted Baker. One of my favourite ways of measuring profitability is to look at a firm’s return on capital employed (ROCE), which compares operating profit with the money that’s been invested in the business.

Anything over 15% is high, in my view. But Ted Baker’s ROCE has averaged 27% since 2014 and was 18% last year, even though it was a bad year.

City analysts expect the firm’s profits to bottom out this year and return to growth in 2019/20. These forecasts price the stock on less than 10 times earnings, with a dividend yield of 5%. If Ted Baker can bounce back after the setbacks of the last 18 months, I think this could be a good level to start buying.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Ted Baker. 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.

Motley Fool UK 2019

First published on The Motley Fool

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