Since the beginning of 2020, the Saga (LSE: SAGA) share price has jumped by around 30%. But even after this performance, I believe the stock remains severely undervalued.
Return to growth
I think it’s fair to say 2020 was a terrible year for Saga. The group was just starting to get back on its feet after spending several years dealing with problems at its insurance business. It had also invested hundreds of millions of pounds in new cruise ships. These vessels were supposed to start earning their keep in 2020. Unfortunately, the pandemic put pay to that.
As a result, the organisation spent much of 2020 in survival mode. However, it wasn’t only the operational problems that weighed on the Saga share price throughout the year. The company also had to deal with management upheaval and a cash call, as well as an activist investor. Put simply, it was a very challenging year for the business.
These issues now appear to be behind the company. It has fortified its balance sheet, a new management team started earlier this year, and it looks as if there is an end to the pandemic insight. After raising additional capital towards the end of last year, it seems to me its balance sheet is also much stronger than it was at the beginning of 2020.
Saga share price value
After the past 12 months’ challenges, I think Saga is a very different business today than it was at the beginning of 2020, and that’s exciting.
I believe the pandemic helped the business wipe the slate clean in some ways. It allowed the organisation to restructure and raise new money from investors. And now, I think the company has the foundations in place to develop its brand and grow sales in the years ahead.
Of course, the company is likely to face further challenges in the near term. The pandemic is nowhere near over, and it could be some time before consumers are confident enough to return in large enough numbers to make Saga’s cruises profitable.
Still, by concentrating on what it does best — offering products to the over-50s market — I think Saga has tremendous potential. It’s one of the most trusted brands in this space, and that reputation alone could be worth hundreds of millions of pounds.
From an investment perspective, even after the Saga share price’s recent performance, I believe the stock offers a margin of safety. It’s trading at a forward price-to-earnings (P/E) multiple of just 8. This suggests to me that if the business can return to growth, it could yield large total returns to shareholders.
On the other hand, if the company continues to struggle, the stock may not fall much further as plenty of bad news is already baked into the stock price.
