Despite the geopolitical and economic turbulence that has shaken the world over the past couple of months, the Saga (LSE: SAGA) share price has sailed through. Since the end of November, shares in the over-50s travel and finance company have increased in value by around 10%.
I think this could be a sign of things to come. With the outlook for the company improving, I believe the stock could hit 400p or more by the end of the year.
Earnings growth
Over the past couple of years, Saga has faced numerous headwinds that have held the group back. Instability as its insurance business and the pandemic caused years of disruption for the enterprise.
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As the world starts to open up again, the outlook for the company’s cruise division is improving. At the same time, its financial services arm is still registering relatively attractive growth rates.
According to the company’s latest trading update, published at the end of January, the number of policies sold by its insurance business increased 1% in the period from the beginning of August to the end of January.
At the same time, its cruise arm generated positive earnings before interest, tax, depreciation and amortisation (EBITDA) in the second half.
These figures appear to show a significant change in direction for the company. It seems to be moving on from its past problems, which could drive a substantial re-rating of the stock in the months ahead.
That being said, I cannot ignore the geopolitical and economic risks that continue to dominate news flow at the moment. These challenges could impact demand for the company’s services, especially if inflation continues to eat away at the purchasing power of UK consumers. This challenge is something I will be keeping an eye on as we advance.
Saga share price opportunity
Despite these potential headwinds, I think the stock looks undervalued at current levels.
According to current City analyst projections, the shares are selling at a 2023 price-to-earnings (P/E) ratio of 5.5. That is compared to the market average of around 14.
These figures seem to suggest that the stock could double in value from current levels. I think that is a tad optimistic, even though in the past, the stock has commanded a P/E of around 8. If the shares can return to this value, the Saga share price could be worth as much as 400p. That suggests a potential increase of 43% from current levels.
As such, I would be happy to buy this stock for my portfolio as an undervalued growth play. Even though the business might face a couple of challenges in the next few months, I think earnings growth could push the stock higher as investors buy into the recovery story. There is also the potential for the enterprise to reintroduce its dividend.
