Do soaring sales make Saga shares a no-brainer buy?

Investors looking for an impressive recovery story need not check further Saga (LSE: SAGA) shares. The price has risen 150% since its 52-week low in October 2022.

Shares got an extra boost from this week’s full year update. The company said “expect to report significant growth in revenue“. That should increase between 40% and 50% compared to the previous year. And it is thanks to the recovery in the cruise and travel business.

Pre-tax profits should be between £20m and £30m. This is still below the profit level before the pandemic. But considering the increased pressure from inflation and interest rates, I think this is a very good performance.

Disposal

In other news the same week, the company confirmed it is discussing the possible disposal of Acromas Insurance Company.

That highlights what I see as one of Saga’s long-term strengths. It’s not just a cruise and travel operator. That can be a capital intensive business, and can lead to a lot of debt on the balance sheet. At the halfway stage on July 31, Saga reported net debt of £721m. For a company with a market cap of just £256m, I think it’s serious.

Also the risk that debt brings when economic times are tough, makes stock prices more difficult. For the final year of 2024, the forecast puts Saga at a price-to-earnings (P/E) of seven times. On the face of it, that can make it look like a screaming purchase.

Organized evaluation

But by including net debt in the calculation, we can arrive at the adjusted P/E for the business itself. Based on the same 2024 forecast, it’s around 25. Suddenly, it doesn’t seem like it’s worth it anymore.

The P/E will hopefully stay lower if Saga’s recovery continues. But the recovery must go through a dark economic period. High inflation, high interest rates, supply chain issues, geopolitical disputes… all are bound to happen at some point.

Business model

With that background, I love the insurance side of the business. It is potentially less capital intensive, although it is still somewhat constrained by economic pressures. I’m not too worried about the possible disposal of Acromas, which Saga says accounts for about 25%-30% of its insurance business.

The company thinks disposal will still be “in line with the evolution towards a capital-light business model and the aim of reducing debt“.

Verdict

So does the Saga’s recovery make it a worthwhile purchase? Well, I think the economic risks we face remain far from that description for me.

I love the company’s evolution, and diversification into travel-related services. But the price is holding me back, especially if I’m in debt.

We’ve seen a lot of tentative recoveries recently that have come back. And I can’t help but fear that this could be something else. I believe I see long-term potential, but I will wait for the short-term risks to play out.