One of the sectors that has picked up a significant amount of strength from the last quarter of 2020 is the Financial sector. When you think about stocks in this sector, you probably think first of banks – especially the biggest names in consumer, commercial and investment banking. That makes a certain kind of sense, but it also tends to deflect focus away from a lot of other types of businesses this sector includes.
One of the segments of this sector that I think is interesting, but and that doesn’t get as much attention is the Insurance industry. Companies that provide insurance products – life insurance, property and casualty, auto, health, and so on – certainly are sensitive to economic cycles, since the average consumer is unlikely to take out new insurance policies if they are already being forced to tighten their belts as much as possible to get by. On the commercial side, one of the primary risks for property and casualty carriers is catastrophic disaster risk. While these types of claims rose in 2017 and 2018, they declined in 2019, which provided a useful headwind for many of the largest companies in the industry.
Traveler’s Companies Inc. (TRV) is an interesting example. This is a large-cap company whose largest business segment is Business and International Insurance, where is provides commercial and property and casualty insurance products and services. Reports throughout 2020 show that COVID-19 claims have been manageable for the company; but 2020 has also marked an interesting year on the catastrophe front in other areas. An interesting news item last month about hurricanes I noticed observed that the National Hurricane Center (NHC) had run through the entire alphabet of hurricane and tropical storm names and had begun using Greek letters – the first time since 2005 that has happened. For TRV, that was almost certainly a contributor to a reported, 82% rise in after-tax catastrophic losses. This is just one type of risk insurance underwriters like TRV deal with, of course, and overall indication show that management has been successful over the past year in improving the overall scope of business, including strengthening Free Cash Flow, liquidity and overall margins with very manageable debt. Does that mean TRV is also a good value at its current price? Let’s find out.
Fundamental and Value Profile
The Travelers Companies, Inc. is a holding company. The Company’s segments include Business and International Insurance; Bond & Specialty Insurance, and Personal Insurance. Through its subsidiaries, it provides commercial and personal property and casualty insurance products and services. The Business and International Insurance segment offers property and casualty insurance and insurance related services to its clients, in the United States and in Canada, as well as in the United Kingdom, the Republic of Ireland, Brazil and throughout other parts of the world. The Bond & Specialty Insurance segment provides surety, fidelity, management liability, professional liability, and other property and casualty coverages and related risk management services to a range of primarily domestic customers, utilizing various degrees of financially-based underwriting approaches. The Personal Insurance segment writes a range of property and casualty insurance covering individuals’ personal risks. TRV has a current market cap of $34.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased almost 48% while sales were about 4% higher. In the last quarter, earnings improved about 57.3%, while revenues were 1.5% high. The company’s margin profile is healthy, with useful signs that it is also getting stronger; over the last twelve months, Net Income was 8.43% of revenues and strengthened to 5.6% in the last quarter.
Free Cash Flow: TRV reported healthy free cash flow of a little over $6.4 billion over the last twelve months. This number has increased from the beginning of the year at around $5.1 billion, and $5.9 billion in the quarter prior. At the stock’s current price, this also translates to a very interesting Free Cash Flow Yield of 28.41%.
Debt to Equity: the company’s debt to equity ratio is .22, which is very low and reflects a conservative approach to debt. TRV’s balance sheet shows $6.2 billion in cash and liquid assets (versus $6.7 billion in June 2020) and $6.5 billion in long-term debt.
Dividend: TRV pays an annual dividend of $3.40 per share, which translates to an annual yield of 2.43% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $160 per share. That means that TRV is undervalued by 28% right now, with an ideal discount price at around $128 per share. It is also worth noting that in the fourth quarter of 2020, this same analysis yielded a $149.50 fair value target price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend from its bear market low in March of last year at around $77 to its recent peak at about $152. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Over the last couple of weeks, the stock’s momentum has turned bearish, with the stock dropping below its last support level at around $141. New support should be around $135 based on consolidation activity in November and early December, but a drop below that point could see continued near-term downside to about $129. That drop below recent support means that immediate resistance is now at $141; a push above that point should give the stock room to push to around $146.50 before finding next resistance.
Near-term Keys: TRV has some interesting fundamental metrics working in its favor right now, including a solid balance sheet, increasing Free Cash Flow and strengthening Net Income. TRV’s value proposition is attractive, but not quite compelling. Given the current state of momentum, a smart value investor would wait to see where the stock’s next support level is before deciding to begin looking for an entry point. That means that for now, the best opportunities to work with this stock lie in short-term trades. A break above $141 would be a good signal to buy the stock or work with call options, using $146.50 as a good near-term profit target on a bullish trade. A drop below $135, could be a strong signal to think about shorting the stock or working with put options, with an eye on next support around $129 as a useful target on a bearish trade.