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Shares in Saga (LSE: SAGA), the over-50s holidays and insurance firm, crashed in December when the company issued a profit warning. At 116p today, we’re looking at a 35% fall over the past 12 months, so what went wrong with this firm that was previously considered a safe long-term investment?
The collapse of Monarch Airlines didn’t help, and it’s expected to result in a one-off hit of £2m. But the more serious longer-term concern is what Saga described as “more challenging trading in insurance broking.” Although Saga’s revenue is split approximately 50/50 between travel and insurance, insurance and underwriting contributes around 90% to profits, so this could be serious.
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Oversold?
But what really makes me sit up is the resulting valuation of the stock. The share price after the sell-off has resulted in a P/E multiple of only 8.7 based on full-year expectations — results are due on 12 April. The prospective dividend yield has been pushed up as high as 7.7%, where it would be covered around 1.5 times by earnings, though I think there must now be some pressure on it.
The share price drop looks overdone to me, and I can’t help seeing more pessimism in the share price than is warranted by the firm’s revised expectations. But then I’m reminded of Carillion, and those who bought in after that company’s first profit warning were thwarted when further warnings came along.
Still, I think Saga is definitely worth watching, and any upbeat news could send the shares climbing again.
Price wars
Dignity (LSE: DTY), the UK’s largest funeral services company, has suffered an even worse crash. The shares were flying high in 2017, but they were already faltering before a profit warning in January sent them to new lows. From above 2,500p levels back in November, today’s share price of 779p represents a fall of more than 70%.
There is, it seems, a serious price war going on in the funeral business, and Dignity is cutting its pricing in order to maintain market share — the cost of a simple funeral has been slashed by 25%, and freezes are in place across its other offerings.
There’s now a 46% fall in earnings forecast for 2018, but with the share price already trodden underfoot, we’re looking at a resulting P/E of around 12. If that marks the end of the rot, the shares could be good value now — and there’s currently a flat year for earnings pencilled in for 2019.
Dividend yield boosted
The falling shares have also pushed dividend yields up to 3%, still covered 2.8 times by earnings. Net debt stood at £521m at the interim stage in June, which is high compared to approximated full-year operating profit of £118m (annualised from first-half figures). But it’s well within the firm’s lenders’ covenants, and I can see Dignity being keen to maintain its dividend.
I’m a bit less bullish about the quick turnaround prospects for Dignity (having seen what price competition did to Tesco and the other big supermarkets), and the big forecast EPS fall is alarming.
But I think the long-term prospects are still good, though I’d like to see a return to forecast EPS growth before I’d consider buying.
