The last time I covered the Saga (LSE: SAGA) share price, I concluded it might be best to give the firm a wide berth for the next two years. That would give us time to see if managements turnaround plan yielded results.
Since my last article on 6th April, shares in the business have fallen a further 44%, excluding dividends. So it looks as if this was the right advice.
However, todays trading update seems to suggest Saga is making headway in dealing with the primary issues affecting the business. I think theres a good chance this could mark the start of the firms turnaround.
Positive update
Ahead of its annual general meeting, Sagas trading update for the period from 1 February to 18 June, claims the group is making progress in the implementation of the strategy announced in April. And despite challenging conditions, trading for the period is broadly in line with expectations.
Most importantly, Sagas insurance business, which has been the groups problem child for the past two years, seems to have stabilised. The volume of direct home and motor policies the company sold during the first few months of 2019 are running well above the run rate level in the second half of the 2018/19 financial year, the statement notes.
Also, an improvement in retentions means the number of core Saga-branded home and motor policies in force at the end of May were flat at 564k. This is hardly a transformative turnaround, but at least the business has stopped shrinking, and thats something.
Unfortunately, Sagas travel business is still shrinking. According to the update, booked revenues were down 4% for the full year as of 15 June compared to the same period last year.
That said, the firms new cruise business is proving to be more resilient with bookings in line with management forecasts for the year. During the second half of 2019, management is planning a significant step up in marketing activities for this business to coincide with the launch of the Spirit of Discovery, its new cruise vessel.
Summing up todays update, outgoing CEO Lance Batchelor said: Against challenging headwinds in both travel and insurance, we see early signs of progress in stabilising our retail broking business and forward bookings for the cruise business have been resilient.
Whats next?
Overall, I think todays update from Saga is broadly positive. While the company is still fighting fires across the business, its encouraging that things havent gotten any worse since April. Thats not to say that the group is entirely out of the woods just yet.
City analysts believe the firms profits will decline by around 37% this year (compared to fiscal 2018), and I dont see this outlook changing following todays update.
Nevertheless, Im cautiously optimistic Saga has turned the corner, and its new business plan is starting to yield results. If the company can keep this up for the rest of the year, it might be worth considering the stock for your portfolio.
Based on current City projections, the stock is trading at a bargain valuation of just 4.5 times forward earnings compared to the market average of 12.7. That implies if growth returns, the Saga share price could double from current levels.
