Fidelity National Financial (FNF) is expected to remain the title pretax margins leader after years of being at the top thanks to its cost-management strategy, and this insurance company hopes to grow some of its noncore/nontitle assets through capital deployment, says Brett Huff, Research Analyst at Stephens Inc.
“FNF in particular is well-known as being the margin leader; title pretax margins is the main metric that folks use, and they’ve been the historic leader over many, many years. We expect that to continue, simply because we think they have the tightest cost management processes in the business. And in addition, FNF is known for buying stock back particularly at or just above book value, so we think that helps provide somewhat of a floor to the stock, and book value is in the low $20, $22, $23,” Huff said.
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Huff says FNF has been growing its restaurant business, among others, and although the timing of the returns from these strategies is not yet clear, he keeps an eye on this insurance company.
“FNF historically has deployed excess capital buying not just title and related mortgage services businesses, but they’ve also bought noncore or nontitle assets, including restaurants, payments processing companies, even things like distressed timberlands, especially over the last few years where they found what they thought were good deals in distressed situations,” Huff said.
Stewart Information Services Corp (STC) is better positioned than other title insurance names to handle the expected downturn in refinance transactions, as STC has a mix of residential title revenue that is 70% purchase and 30% refinance, therefore positioning the company to keep their revenue and earnings stable and even up in the next couple of years, says Brett Huff, Research Analyst at Stephens Inc.
“Refinance activity has been very high over the last year, year and a half because rates are low. And we suspect with those refinance transactions that growth will level off and then start to decline as most people will have refied over the next couple of quarters,” Huff said. “We think Stewart is best positioned to handle this downturn in refi, simply because their mix of revenue of residential title revenue is 70% purchase and 30% refi. So relatively low percentage of refi.”
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Huff believes that STC‘s revenue and earnings will be stable and possibly up in the next year or two more, and he also point company-specific factors that position STC well for the future.
“[Stewart] has some company-specific things that it’s doing. Its operational execution prior to a new CEO coming on about a year and a half ago was subpar for the industry, and as a result they tend to have a lower multiple both on book value and on EPS. We think they are doing good work on improving their operations, have done so and will continue to do so. So we think there are some company-specific things that Stewart could drive to provide upside to expectations in 2014,” Huff said.
Dr. Phillip Frost has managed the creation of several pharmaceutical and biotechnology companies. In an interview from September 2008, Dr. Frost is given credit for the creation of Opko Health (OPK) and is described by then Executive Vice President Samuel J. Reich: “Our CEO and Chairman is Dr. Phillip Frost. He is a dermatologist who has been a successful entrepreneur in the pharmaceutical industry. He started a company called Key Pharmaceuticals when he was the Chairman of Dermatology at Mount Sinai in Miami and successfully built that business up and sold it to Schering-Plough in 1986, at which time he started IVAX, which again he devoted 20 years to build and sold it in 2006 to Teva. Dr. Frost is a visionary and a great leader.”
Certainly the stock price of Opko has responded well, increasing from $1.77 per share at the time of this interview to over $6.50 per share currently. Recently, both the Chief Technology Officer and Vice Chairman of the Board of Opko, Dr. Jane Hsiao, and Dr. Frost have been buying shares in Opko Health, as can be seen in SEC filings here and here.
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Dr. Frost is also investing in PROLOR Biotech (PBTH), and this company has announced that it will be merged into Opko in a share-for-share acquisition. Boris Peaker, an Executive Director and Senior Analyst at Oppenheimer & Company, described the company in this September 2012 interview: “PROLOR’s technology shows that their version of growth hormone is effective and may be given once a week, maybe every two weeks, but for now at least once a week. And we think it could be a game changer for the growth hormone market, which is well established at this point.”
Dr. Frost has been acquiring more shares of PROLOR as the merger moves forward, some as recently as June 4, according to this SEC filing. With these insider purchases, a track record of value creation and support for their drug-development plans from an experienced biotech investment analyst, this business combination appears to have many positive attributes.
Metlife Inc (MET) and Lincoln National Corporation (LNC) are two companies trading below book value at 8 times forward earnings that are looking to use capital to buy back stock, thus forecasting a positive outcome on the interest rate environment, says Randy Binner, Managing Director at FBR Capital Markets & Co.
“MET and Lincoln, which I’m going to mention in a second, all have the ability to buy back stock. We think they all have sufficient excess capital to buy back stock…when they enter into these buybacks, they’re accretive because they are below book value, and so when large, well-managed companies buy back stock below book value, that’s a good thing,” Binner said.
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MET and LNC are both currently trading at around 85% book value excluding AOCI at 8 times forward earnings, and Binner believes both companies can buy back stock attractively from a capital perspective.
“People worry about their exposure to lower interest rates, but from a capital perspective, we believe they can and will buy back stock attractively under book value. They will take that capital and buy back stock with it when the markets are really worrying about their business exposure to interest rates, so those companies are forecasting a better outcome than the market is, quite frankly, when it comes to interest rates,” Binner said.
Employers Holdings (EIG) has seen the conditions around its workers’ compensation business improve with double-digit rate increases and stabilized cost trends, and Amit Kumar, Vice President and Senior Analyst at Macquarie Group Limited, expects significant upside from this insurance company’s stock.
“The biggest draw with [EIG] is workers’ compensation market conditions have improved. They’re getting double-digit rate increases. The loss cost trends have stabilized. If you go back to 2011, that was a time when there was a lot of debate if this line, which is workers’ compensation line — with the performers in this line sort of blow up. Our analysis of the industry shows us that that is not the case,” Kumar said.
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Kumar says recent analysis of this stock confirms his thesis, and he expects the stock to increase in price given the improving conditions this insurer is facing and the increased M&A interest in this segment.
“Recently we did a full industry analysis and walked away with increasing confidence on this line, so in my mind, if you’re looking at the pricing, if you’re looking at the loss cost trends and then you look at where the stock is trading at and our runoff value analysis, you can see that there is a meaningful upside to Employers Insurance Group,” Kumar said.
Argo Group International Holdings, Ltd. (AGII) currently trades at one of the largest discounts to book value in the entire property and casualty insurance space, with the potential to reach double-digit return on equity by 2015, says Amit Kumar, Vice President and Senior Analyst at Macquarie Group Limited.
“Recently, we were on the road with Argo Group management, and if you look at some of the road maps they have laid down, the ROEs for Argo Group could reach close to double-digit or slightly lower by 2015. If that is the case, the stock will start trading a bit more in line with some of the peers. Currently, Argo is trading at the one of the biggest discounts to book value in the entire P&C space,” Kumar said.
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Kumar says AGII is one of the insurance stocks he likes, and he says seeing management’s plans shed more light on why the insurer could expect significant upside the upcoming few years.
“Again, it’s a specialty insurance play, it trades at meaningful discount to book, it has a mid-single-digit ROE,” Kumar says.
Hewlett-Packard Company (HPQ) currently trades at 4.5 times cash flow and is set to benefit from a turnaround in the PC, enterprise server and printer markets and rebound to a more historic valuation, says David Steinberg, Managing Partner and Founder of DLS Capital Management LLC.
“[HPQ] trades 4.5 times cash flow. You’ve got a great new manager, Meg Whitman, running that business, who should be able to do some basic blocking and tackling. And you should be able to see that business rebound to a more historic valuation level. Even at a big discount, let’s say a six enterprise value to cash flow multiple, which is not even high for its history,” Steinberg said.
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Steinberg says that even though PC demand is going down, the enterprise software and computer equipment markets are still rising, and HPQ is still a solid player in this arena and is already seeing its stock rebound.
“Everybody thinks PCs are dead and so forth, and their demand is certainly going to go down, but enterprise software or enterprise computer equipment is still rising. As well, they still have a great solid printer business. So you have patents, you have all sorts of great things, but the company had been abandoned by its institutional shareholders and dropped to $12 per share. It’s already begun to rebound to $20, but it had been $50 just a couple of years ago,” Steinberg said.
Salesforce.com, inc. (CRM) is giving companies like Coca-Cola (KO) and Toyota (TM) new abilities to do business with CRM’s innovative platform service, which gives companies an easy, cost-efficent organization of tools to build customized applications, says Alex Zukin, Research Analyst at Stephens Inc.
“The level of excitement around giving business people, without having to hire armies of developers, the ability to basically build customized applications that create business value is a huge new innovation…Salesforce likes to talk about when they go into a plant like Coca-Cola, it almost becomes an exploratory sale, where they try and figure out what is the business problem that they are trying to solve, and then with partners build an application in very little time to actually solve that problem. Coca-Cola‘s application around vending machines communicating with each other to make sure that the drinks that they are providing are the ones that are actually wanted in that area, so optimizing what is actually happening in those machines,” Zukin said.
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CRM is revealing new use cases that traditionally haven’t been available before, an example being the application CRM built for Toyota, which had an element where cars could communicate with the dealerships and provide data, Zukin says. CRM is seeing growth in the platform business, indicating that companies are seeing rewards from this new way of doing business, Zukin adds.
“You’re seeing the growth of Saleforce‘s platform business and a lot of other companies starting to talk about the platform as evidence that they are taking it, and they are feeling empowered to create applications that solve their problems, that give them new ability to do business,” Zukin said.
ACE Limited (ACE) has one of the strongest book value growths over the last decade among insurers, with global exposure to growing international markets and also to improving domestic segments of the insurance markets, says Amit Kumar, Vice President and Senior Analyst at Macquarie Group Limited.
“If you look at ACE, clearly it’s a global business mix play. If you’d look at the book value CAGR, which means how well the company has done in terms of value creation, and if you go back to let’s say 2003, you will see that ACE has had one of the strongest book value CAGRs, compounded annual growth rate, of midteens since 2003, which meaningfully outpaces the rest of the players in the space. In terms of business mix, the U.S. and non-U.S. are split evenly,” Kumar said.
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Kumar says ACE‘s exposure to P&C is only in the single digits, and the company’s exposure to Latin America should eventually reflect into the stock price. He also says its exposure to crops has meaningfully improved.
“Now, as I said, property catastrophe is the area that is under pressure, but for ACE, reinsurance is only 7% of their business mix. So again, their fortunes are not tied. The company is known for being ahead of the curve and recently has made multiple international acquisitions, especially in Mexico, but the stock has lagged. The stock is up only 14% for 2013 versus peer group, which is 22%. Not only all these good things, ACE is also the second-largest crop insurer in the U.S. with 21% market share. Recently, we did a Midwest crop tour, and our takeaway was that crop planting conditions had meaningfully improved over last month. So ACE is a great place to hide during this volatile pricing environment,” Kumar said.
Travelers Companies (TRV) sees improving macroeconomic and industry metrics, and pricing for this insurer is expected to remain stable while the loss reserves seem to be lower than previously expected, says Amit Kumar, Vice President and Senior Analyst at Macquarie Group Limited.
“If you also look at the small business trends and look at the ADP small business survey, you will see that the small business trends are improving. Separately, if you’re looking at the market surveys, let’s say you look at the Council of Insurance Agents & Brokers or the MarketScout pricing survey, you’ll see that pricing still remains stable in the 5% range. And finally, if you look at Travelers‘ balance sheet and analyze the quality of their loss reserves, you’ll walk away saying that Travelers’ loss reserves are redundant by 5%,” Kumar said.
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Kumar also says the underwriting at TRV is reason for investor confidence, and he says Q1 saw improvement in the company, while the overall U.S. economy saw encouraging signs for the insurance industry.
“If you look at Travelers, it’s a great proxy if you wanted to stick with mostly a U.S. carrier. If you look at pricing commentary, it was very strong in Q1. Last Friday we spent some time at their Claims University looking at the underwriting process. We walked away with incremental confidence in the underwriting process. Separately, I would say that if you look at unemployment, that’s a good proxy for payrolls, and unemployment is down to 7.5% for April — that compares to 8.1% for 2012,” Kumar said.
