That was back in July. Since then, shares in the group, which is best known for its range of holidays and financial products aimed at the over 50s, have drifted sideways.
The most significant development since I last covered the company is the involvement of activist hedge fund Elliott Capital Advisors.
Only a few days after my last article on Saga, the hedge fund announced it had taken a 5.1% stake in the business. Elliott has a history of building positions in troubled companies and then pushing management to break up or sell, generating enormous profits for shareholders in the process.
So far, the firm hasn’t revealed its intentions at the specialist insurance and travel business. However, just having the hedge fund on the shareholder roster could be enough to push management to make some substantial changes.
Elliott’s involvement comes at a tough time for Saga. Not only is the company trying to restore its reputation, but it’s also looking for a new CEO.
Lance Batchelor, who has been with the business since just before its initial public offering in May 2014, announced he is planning to step down in January. Whoever steps into his shoes will be responsible for executing the turnaround strategy and, more importantly, will be accountable if any further problems emerge.
As it stands, City analysts are expecting big things from the company over the next 12-24 months. Analysts have pencilled in earnings growth of 102% to 7.6p for 2019, which puts the stock on a forward P/E of 5.7. They’re expecting further earnings growth of 7.7% in fiscal 2021.
If the company meets these forecasts, I see no reason why the stock cannot double from current levels. The rest of the insurance industry is trading at a forward P/E of around 11. This implies shares in Saga are substantially undervalued at current levels.
Risk vs reward
It seems to me that the main reason why the market is placing such a low valuation on the Saga share price is a lack of trust in management. The company needs to prove to the market it can return to growth. The only way to do this is to put up the numbers.
That could be why Elliott has decided to take a position now. If the company does execute a successful turnaround, they stand to make a bundle. If not, the hedge fund owns enough of the business to push for change at the top.
Considering all of the above, I think it could be an excellent time to buy the Saga share price right now. Investors could see an upside of more than 100% from current levels if the company returns to growth. And if it doesn’t, Elliott will push for change. Either of these scenarios will lead to attractive returns for investors, in my opinion.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.