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While many of her clients are energetically aging, Saga (LSE: SAGA) has been looking more and more over the hill.
The insurance-like service provider that specializes in clients over 50 has seen sales collapse and has been at a loss for four years in a row. Saga’s share price has fallen 40% in a year. Over five years, the picture looks even worse, with a 90% decline.
But has the company turned the corner, meaning it could now be a bargain for my wallet?
Upbeat Business Statement
Losing money for four years in a row is a red flag for me. My goal is to invest in companies with a proven business model. Consecutive losses like this raise a concern in my mind that Saga’s business model lacks strength.
But the company issued an upbeat business statement this morning, covering a period from August through this week. He expects revenue to show 40-50% growth compared to the prior year period. It said it remains on track to report underlying earnings before tax for the full year of £20m to £30m.
The strong recovery in its cruise and travel businesses is helping Saga to generate revenue again. Cruise revenue for the year is expected to double compared to last year.
However, the insurance business seems less healthy. Policy sales in the insurance brokerage division are declining. The underwriting business is dealing with double-digit claims percentage inflation.
Unconvincing business model
On paper, I think Saga has brilliant potential as a business. Their focus on a particular demographic that often has specific, costly needs and money to spend on solutions for them could be very lucrative.
But the business has struggled to deliver on this potential. Net debt stood at £721m in the interim stage and is expected to end this month slightly above that. Discussions with lenders have improved Saga’s flexibility in managing its loans, but its balance sheet remains alarming to me for a loss-making company with a market capitalization of £222m.
The positive pre-tax underlying profit figure may sound like good news. However, I prefer to focus on the reported benefit, not the underlying one. Last year, for example, an underlying pre-tax loss of £6.7m compared to a much higher reported pre-tax loss of £23.5m. The previous year saw an even more dramatic disparity, with an underlying pre-tax profit turning into a pre-tax loss of £61.2m under the law.
more work to do
Saga is not out of the woods as a business despite growing sales revenue. His core concept of targeting the old-money market for major purchases like insurance policies and cruise ships continues to appeal to me. In the past it was very profitable for the company. Increased sales could help make that happen again, which could boost Saga’s share price.
For now, though, the company is heavily in debt and has a history of losing money in recent years. While travel demand is picking up, it remains below pre-pandemic levels. Saga’s insurance business could see profits reduced due to a challenging market environment.
I’m not convinced that Saga’s share price will turn out to be a bargain. I don’t like its risk profile or its debt and I will not add the company to my portfolio.
