Shares in over-50s insurer Saga (SAGA) are taking a beating as investors are troubled by lower profit guidance for the next two years.

The company, which sells financial, leisure and travel services to typically retired Brits, saw its stock collapse 24% in trading on Wednesday, to 137.1p. That means Saga's market value has lost nearly £500m at a stroke, with the company today worth £1.54bn.

So could this be an opportunity to pick up shares in the business for the long-term at a relative bargain?

WHAT HAS GONE WRONG?

Saga says pre-tax profit growth will be virtually non-existent this year to 31 January 2018. The company blames ‘challenging trading’ in its insurance broking arm plus higher investment costs.

The company is pretty gloomy about next year too. This means next year's pre-tax profit is likely to fall by around 5% again, although detailed forecasts are as yet unavailable.

There's also the unfortunate one-off £2m cost incurred following the collapse of Monarch airlines earlier this year. That's hit Saga's tour operator business.

PROFIT WARNING IN CONTEXT

Today's news is certainly disappointing but may well have many investors wondering if the share price is over-reacting.

Analysts at Numis calculate that the expected pre-tax profit this year will add-up to a rough 4% to 5% miss, or a shortfall of £7m. To put that into perspective, Saga posted a £103m pre-tax profit in the first half of this year alone.

Reassuringly, management is adamant that it will not need to cut the dividend, clearly an important part of the investment story.

Before today's slump, the shares were offering a prospective 5.1% income yield, according to Reuters data. Today the yield sits at a very generous-looking 6.7%.

BUSINESS FUNDAMENTALS

When push comes to shove, Saga has a fantastic brand and customer loyalty runs very high.

That is all the more impressive when you consider how competitive parts of its markets are.


Issue Date: 06 Dec 2017