Is the Saga share price still undervalued?

When I covered the Saga (LSE: SAGA) share price recently, I repeated my belief that the stock remains undervalued. However, after rising more than 50% year-to-date, and nearly 90% over the past 12 months, I’ve been wondering if the equity still looks cheap. 

Placing a value on the Saga share price

To try and determine how much the company could be worth, I first need to consider its potential. Over the past 18 months, the over 50s travel and finance specialist has been to the brink and back.

Luckily, after substantial refinancing and a management clear out, it’s now back on a stable footing. But that doesn’t mean the group is out of the woods just yet.

As long as coronavirus continues to circle the population, there’ll be a threat to the group’s business model. Another significant outbreak of the virus could cause it to postpone cruises, which have only just restarted.

That said, the company is in a much stronger position today than it was this time last year. Indeed, at that point, the company was struggling to find financiers that would loan it money to maintain operations.

The environment has changed so much since then that it was able to issue £250m of bonds at an interest rate of 5.5% at the end of June. The proceeds of the issue have been used to pay off more expensive forms of debt and provide working capital. 

At the same time, the company has been able to restart its cruise operations, bringing some much-needed cash flow into the operation.

Back to profit 

All of the above suggests the company is on track to move back into profit within the next year or two. That makes it easier for me to place a value on the Saga share price.

Based on the company’s own projections, City analysts reckon it will report earnings per share of around 15p for its current financial year. Earnings could rise to 59p by fiscal 2023. These are just estimates at this stage and are subject to revisions. Nevertheless, I think they show the stock’s potential. 

Based on these estimates, the average City analyst price target for the stock is 515p. 

However, I think investors should take these projections with a pinch of salt. After all, the company’s recovery isn’t guaranteed, especially considering the fact that coronavirus is still a very real and present threat. More lockdowns could make these projections completely redundant. 

Still, in the best-case scenario, where the company returns to growth in the next two years, I think the Saga share price could head higher. The market may be happy to pay more for the stock as the outlook for the cruise industry improves. 

As such, I think the stock could still be undervalued if the economy continues to recover. That’s why I’d buy the shares for my portfolio today.