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Shares in the over 50s insurance and travel group Saga (LSE: SAGA) have taken a big hit today. As I write, Saga’s stock price is down about 18% from yesterday’s closing price. However, earlier this morning, it was down about 25%.
So what’s going on here? And does this big stock price drop present a buying opportunity for me?
Why did Saga’s stock price increase?
Saga shares are down sharply today because the company posted a profit warning.
It said its results for the half year ended July 31 are now expected to deliver an underlying profit before tax of £20m-£30m this financial year. It had previously expected profits of £35m-£50m.
The company blamed high inflation (it says 13 percent inflation) in its insurance division for the drop in profitability. “Trading conditions in the UK insurance market continue to be challenging.” said CEO Eun Sutherland. He added that he expects high claims inflation to continue in the near future.
It’s not all bad news
It is worth noting that there are 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 was £14m, compared with a loss of £2.8m a year earlier.
Meanwhile, the company said the cruise segment is well on its way to meeting targets for this year and next.
The team has big plans for the future. “Looking ahead, we are confident that Saga will now be in a stronger position than it was before the pandemic, while remembering that the external environment remains challenging. By building a customer lifetime value model and creating long-term value for our investors, Saga is committed to creating the largest and fastest growing business network for seniors in the UK.” Sutherland said.
However, these positive sentiments were ultimately overshadowed by profit warnings. In the current environment, investors have very little tolerance for guidance that falls short of expectations.
Are Saga shares worth buying?
So can I buy Saga shares today after the big drop? The answer to that question is no. If business conditions improve and profitability improves, I think the stock could see a rebound at some point. After all, it has taken a big hit recently.
But there are a few things that turn me off here. One is the number of profit warnings in recent years – very few. I would like to see Saga’s track record of profitability before investing.
Another issue for me is the debt on the balance sheet. At 31 July, net debt was £721m. It is high. Having said that, the company has some protection here as it owns two new cruise ships with a combined value of around £612m.
A third issue is the lack of dividends. If I invest in insurance, I want a regular dividend.
Given these issues, I’m happy to leave Saga Shares on the watch list for now.