2019 has been a year of consolidation for Saga (LSE: SAGA). As I noted the last time I covered the company, after revealing deep problems at its insurance business in 2018, throughout 2019, management has been trying to get customers to return to the brand.
According to recent trading updates, these efforts are starting to pay off.
In September, chief executive Lance Batchelor, who is due to step down in January, announced that the group is making “good progress” winning back customers with its revamped insurance offering and other products aimed specifically at the over-50s.
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I expect this trend to continue throughout 2020, and as we get more insight into Saga’s turnaround, I think the market will re-rate the stock higher.
Undervalued
Based on current City estimates, if all goes to plan, the company is set to earn 7.76p for its 2020 financial year, which puts the stock on a forward P/E of just 6.4, around half of the market average. On that basis, I think the Saga share price has the potential to double from current levels.
But Saga’s depressed valuation is not the only reason why I think the stock could double in 2020.
I think income seekers will also be drawn to the business as its turnaround continues to take hold. Earlier this year, management decided to slash the payout to free up cash to fund the group’s turnaround.
However, as growth returns over the next 12 to 24 months, City analysts are forecasting a near doubling of the company’s total annual distribution. These forecasts suggest that Saga could yield as much as 8.3% for its 2021 financial year, nearly double the market average.
If the company can meet these targets, then I think income hunters will rush to buy the stock pushing the stock up and yield down towards the market average. This once again suggests that the Saga share price has the potential to double from current levels.
Buyout
The third and final reason why I’m optimistic about Saga’s outlook in 2020 is the company’s takeover potential.
Takeover rumours have been floating around for a while, but I reckon potential suitors are going to sit on the sidelines until there’s more clarity around the firm’s long-term outlook. Buyers won’t want to take the risk of paying hundreds of millions for Saga only to watch it go out of business a few months later.
Estimates vary as to how much a third party might be willing to pay for the business, but analysts have suggested a price of between 80p to 100p per share. That implies an upside of just over 100% at the high end.
These are only projections right now. There’s no certainty any deal will emerge. Still, I think these numbers show just how undervalued the Saga share price is and what the future could hold for the stock as the company’s turnaround finally starts to take hold.
