Shares in over-50s insurance and travel group Saga (LSE: SAGA) have taken a big hit today. As I write, Saga’s share price is down roughly 18% on yesterday’s closing price. However, earlier this morning, it was down about 25%.
So what’s going on here? And has this big share price fall presented a buying opportunity for me?
Why Saga’s share price has tanked
The reason Saga shares are down heavily today is that the company has posted a profit warning.
In its half-year results for the period ended 31 July, Saga said it now expects to generate an underlying pre-tax profit of £20m-£30m this financial year. Previously, it was expecting profit of £35m-£50m.
The company blamed high levels of inflation in its insurance unit (claims inflation of 13%) for the drop in profitability. “Trading conditions in the UK insurance market continue to be challenging,” said chief executive Officer Euan Sutherland. It added it expects the high levels of claims inflation to continue in the near term.
Not all bad news
It’s worth noting that there were some positives in the half-year results. For example, the company returned to profit after posting losses during the pandemic. For the period, underlying profit before tax amounted to £14m versus a loss of £2.8m a year earlier.
Meanwhile, the company said that its cruise segment is doing quite well and on track to achieve its targets for this year and next.
The group also has big plans for the future. “Looking ahead, while we are mindful that the external environment remains challenging, we are confident that Saga is now in a stronger position than it was before the pandemic. We are determined to build Saga into the largest and fastest-growing commercial network for older people in the UK, building a customer lifetime value model and creating long-term value for our investors,” said Sutherland.
However, these positives were ultimately overshadowed by the profit warning. In the current environment, investors have very little tolerance for lower-than-expected guidance.
Are Saga shares worth buying?
So would I buy Saga shares today after the big drop? The answer to that question is no. I think the stock could potentially see a rebound at some point if business conditions get better and profitability improves. After all, it has taken a massive hit recently.
But there are few things that turn me off here. One is the number of profit warnings in recent years – there have been quite a few. I’d want to see Saga put together a decent track record in terms of profitability before investing.
Another issue for me is the debt on the balance sheet. At 31 July, net debt was £721m. That’s high. Having said that, the company does own two new cruise ships that have a combined book value of around £612m, so it does have some protection here.
A third issue is the lack of dividend. If I was to invest in an insurer, I would want regular dividends.
Given these issues, I’m happy to leave Saga shares on my watchlist for now.
The post Here’s why Saga’s share price has crashed today appeared first on The Motley Fool UK.
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Edward Sheldon has no position in any of the shares 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.