Could soaring sales boost a sagging Saga share price?

While many customers are aging in spirit, Saga (LSE: SAGA) has seen the top of the mountain.

Service providers such as insurance that specializes in customers over the age of 50, have seen sales collapse and make losses four years on the trot. Saga’s share price has fallen 40% in a year. Over five years, the picture looks worse, with a 90% decline.

But has the company turned the corner, meaning it can now be an offer for my portfolio?

A good trading statement

Losing money for four years in a row is a red flag for me. I want to invest in a company with a proven business model. Such continued losses have raised concerns that Saga’s business model is weak.

But the company issued an upbeat trading statement this morning, covering the period from August to this week. It expects revenue to grow by 40-50% compared to the previous year period. It said it remained on track to report pre-tax profits for the full year of £20m-£30m.

A strong recovery in the cruise and travel business helped Saga return to profitability. Cruise revenue for the year is expected to double compared to last year.

The insurance business seems less healthy. Policy sales in the insurance brokerage division are down. The underwriting business has been grappling with double digit percentage claims inflation.

Unconvincing business model

On paper, I think Saga has great potential as a business. Focusing on specific demographics that often have special needs, is expensive and money to spend on these solutions can be profitable.

But businesses have struggled to deliver on that potential. Net debt is at £721m at the interim stage and is expected to end this month slightly higher than that. Discussions with lenders have increased Saga’s flexibility in arranging loans, but the balance sheet remains a concern for me as a loss-making company with a market capitalization of £222m.

A positive figure for pre-tax profit may sound like good news. However, I prefer to focus on the reported profit and not the underlying one. Last year, for example, the underlying pre-tax loss was £6.7m compared to a larger pre-tax loss of £23.5m. The previous year saw a more dramatic difference, with underlying profit before tax turning into a pre-tax loss of £61.2m on a statutory basis.

More effort

Saga is not out of the woods as a business even though sales profits are increasing. The core concept of focusing on old markets that are great for big ticket purchases like insurance and cruise policies still appeals to me. The month is very profitable for the firm. Rising sales could help that happen again, boosting Saga’s stock price.

But now, the company is heavily in debt and has a history of losing money in recent years. While travel demand is recovering, it remains below pre-pandemic levels. Saga’s insurance business could see profits from a challenging market environment.

I’m not sure Saga’s stock price will be that low. I don’t like the risk profile or the debt pile and won’t be adding the company to my portfolio.