Is the Saga share price a buy?

Businessman standing in front of screen
Businessman standing in front of screen

Emerging markets-focused asset managerAshmore Group(LSE: ASHM) seems to be outperforming its peers in a harsh environment. A trading update published by the company today revealed that assets under management (AUM) for the quarter ended 31 December 2018 increased by 0.4% overall. Net investment inflows across its investment strategies totalled $0.5bn although a negative investment performance of $0.2bn dented overall AUM performance.

According to CEO Mark Coombs, these figures reflect “investors’ very low allocations to Emerging Markets and recognition of the value available.” And it seems he is onto something because Ashmore is vastly outperforming its fund management peers on the AUM front.

For example, Jupiter’s AUM dropped to £42.7bn at the end of 2018, down from just £47.7bn three months previously. Meanwhile, City analysts have noted that net outflows from Standard Life Aberdeen’s Global Absolute Return Strategies (Gars) are at record levels and will hit £12bn in 2018.

Against these numbers, Ashmore’s meagre growth stands out.

With this being the case, I might be attracted to the shares if they were appropriately priced. Unfortunately, that is not the case. Shares in Ashmore are currently changing hands at a forward P/E of 15.9, which to my mind is too pricey considering the state of the rest of the industry. Indeed, at this level, even a slight deterioration in Ashmore’s fortunes could result in a significant drop in the share price, so I’m avoiding the shares for the time being.

Recovery play

In comparison, I reckon shares in Saga (LSE: SAGA) might be undervalued. Right now, the stock is trading at a forward P/E of just 7.9 and supports a highly attractive dividend yield of 8.7%.

It is fair to say that this business has run into a few problems over the past 18 months. In December of 2017, a profit warning sent the Saga share price plunging, and it has struggled to recover ever since. Management warned on profits following a change in the way the company manages its insurance division, which caused earnings per share to slide from a high of 14.2p in 2017, to an estimated 13.1p for fiscal 2019.

Analysts believe fiscal 2019 will be the last year of falling profits, and after that, earnings should begin to expand again as growth initiatives start to pay off, particularly Saga’s investment in its cruise business.

Right now it looks as if there is already plenty of bad news factored into the share price, and the current valuation suggests investors don’t believe in Saga’s growth story. The firm needs to prove to the market it’s back in business, and when it does, I think the share price could rise significantly from current levels as investors buy back in. On the other hand, if earnings continue to stagnate, I don’t see much more downside for the stock in the near term.

This is an attractive risk/reward trade off in my view. Put simply, I think it is worth buying the Saga share price for its turnaround potential. A dividend yield of more than 8% only sweetens the deal for me.

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Rupert Hargreaves owns shares in Standard Life Aberdeen. The Motley Fool UK has recommended Standard Life Aberdeen. 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.