The Saga (LSE: SAGA) share price has charged higher by 69% this year. By comparison, the FTSE All-Share Index has returned just 7%, excluding dividends.
Over the past 12 months, the stock has returned around 53% after adjusting for its share consolidation.
Even after this performance, I think shares in the over-50s travel and finance specialist remain undervalued. Therefore, I’d buy the stock for my portfolio because I feel there are further gains to come.
Saga share price outlook
This time last year, the company was stuck on the rocks. The coronavirus crisis threatened to decimate Saga’s fledgeling cruise ship business. Meanwhile, its insurance business which, historically, had been a profit centre for the group, was only just starting to emerge from a multi-year turnaround.
Saga managed to negotiate a restructuring of its balance sheet, and buy breathing room from creditors, in the third quarter of last year, dramatically improving its outlook.
And now management is gearing up for the reopening of the UK economy. According to its latest trading update, the company’s travel arm is seeing “significant pent-up demand from customers.” Indeed, they’ve booked cruises worth a total of £154m over the next two years.
On top of this improving sales outlook, total cash available to the group at the end of 2020 was £75.4m. Even though Saga is still burning through roughly £6m for every month its cruise ships aren’t at sea, this cash reserve seems to be more than enough to sustain the business until customers can be welcomed back.
As such, even though the group posted a £61m pre-tax loss for the financial year to the end of January, it seems to me the outlook for the Saga share price is now brighter than it has been since the start of the pandemic.
The valuation is appealing
In the three years between 2016 and 2018, Saga earned an average net profit of around £140m. By comparison, the company’s current market capitalisation is £539m.
If the group can return to this level of profitability, then the stock looks cheap at current levels. This optimistic outlook is the main reason why I’d buy shares in the company for my portfolio today.
Unfortunately, such a recovery is far from guaranteed. Many challenges could hold back Saga’s comeback. These include another wave of coronavirus, the company’s elevated level of debt, and an overly-cautious attitude among customers.
These potential challenges could hold back growth, preventing the company from returning to pre-Covid levels of profitability.
As such, while I think the Saga share price looks undervalued, despite its recent performance, this company may not be suitable for all investors. Still, even after taking these risks into account, I’d buy the stock as a recovery play for my portfolio today.
