Ensuring Returns
From the smartphones in our pockets to the roofs over our heads, our daily lives are interwoven with assets and technologies that enhance our quality of life. However, they also expose us to new forms of risk. This evolving landscape demands innovative solutions that safeguard our physical and digital lives, while providing peace of mind in an ever-changing environment.
In this edition of the Smart Investor newsletter, we delve deep into the operations of one of the prominent specialty insurers, equipping investors with the knowledge needed to make well-informed decisions in a constantly evolving landscape.
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Last Week’s Portfolio Movers
❖ Super Micro Computer (SMCI): Shares have continued their wild ride over the past several days, being pulled in different directions. Profit-taking and fears of a bubble are pushing prices down, while simultaneously analysts are upgrading the stock’s price targets. Thus, Rosenblatt Securities lifted its PT from $700 to $1,300 (the stock currently trades at ~$850).
❖ Coca-Cola FEMSA (KOF): Stock fell even though the company’s revenues and earnings surpassed estimates, probably on profit-taking after the stock surged by over 40% from its October low.
❖ EMCOR Group (EME): Shares jumped almost 11% over the last few days, as investors rushed in before the company releases its earnings report (scheduled later today). In Q3 EME beat EPS estimates by 33. While the expectations are high, many investors believe EMCOR can surpass them again, as it has in all quarters except for one since the time it has been covered by analysts.
❖ Broadcom (AVGO) is reported to be nearing a deal worth about $4 billion to sell an end-user computer unit—which was part of its acquisition of software maker VMware—to the private equity firm KKR & Co (KKR).
❖ Taiwan Semiconductor (TSM) opened its first plant in Japan to further its global expansion. Japan is trying to revive its chip manufacturing capabilities and re-jolt its manufacturing, with these efforts bearing fruit as the West’s trade tensions with China accelerate. In fact, many analysts believe Japan will be able to replace Chinese advanced tech production. Within this framework, Tokyo has pledged a subsidy of almost $5 billion to TSM to build a second factory in Japan.
❖ Stellantis (STLA): shares jumped after the automotive conglomerate published its full-year 2023 results, featuring record net revenues, net profits, and industrial free cash flows, as well as an announcement of a substantial dividend increase, and a large new share repurchase program. In addition, STLA announced a partnership worth several billion euros with Ayvens, a French leasing and fleet management company, which will buy up to 500,000 vehicles from the conglomerate.
Portfolio Earnings and Dividend Calendar
❖ The Q4 2023 earnings season for Smart Investor Portfolio companies is winding down, with no reports scheduled for the next week.
❖ The ex-dividend dates for McKesson (MCK) and Cigna (CI) are February 29th and March 5th, respectively.
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Weekly Portfolio Trades
Today, a formidable player in the specialty insurance sphere, Assurant, is being added to the Smart Investor Portfolio. Some companies are being examined for their continued relevance, though we don’t see it as appropriate to sell any of our holdings at the present time. Our Portfolio is currently outperforming the S&P 500 index by a wide margin, while having lower overall volatility, and we are quite happy with our holdings.
New Buy: Assurant, Inc. (AIZ)
Assurant, Inc. (previously known as Fortis) is a leading global provider of non-life insurance and customized risk management solutions. The company offers a variety of products and services, including mobile device protection, vehicle protection, and renter insurance.
The company was founded in 1892, and since has expanded its offerings and geographical presence through acquisitions and partnerships. Today, Assurant, Inc. is a Fortune 500 company, headquartered in Atlanta, Georgia, operating in 21 countries across North America, Latin America, Europe, and Asia-Pacific, and providing services to over 300 million customers worldwide. The company has a market capitalization of $9.3 billion and annual revenues of 11.1 billion. Assurant’s shares have been traded on the NYSE since 2004.
Diversified Services, Strong Partnerships
Assurant operates through two main segments: Global Lifestyle and Global Housing. The Global Lifestyle segment provides mobile device solutions, consumer electronics and appliances, vehicle protection, and other related services.
The Global Housing segment offers lender-placed homeowner, manufactured housing, and flood insurance, as well as renter insurance. In addition, the segment provides voluntary manufactured housing and homeowner insurance, and other specialty products. Assurant offers administrative services, property risk management services, underwriting services, and claims management services.
Assurant derives its revenues through premiums on its insurance policies and fees earned from its services, as well as through investments in various financial assets. Its revenue streams are diversified across products, customers, and geographies, helping the company mitigate risk and increase revenue stability.
Assurant holds a strong competitive position in its target market niches, which further supports earnings. In addition, the company’s long-term and varied exclusive relationships with leading lenders, mortgage servicers, mobile phone providers, retailers, original equipment manufacturers, and property-management firms are a key competitive advantage, as they result in high partner and customer retention rates.
Strong Fundamentals and Operating Performance
Assurant boasts robust financial health with a negligible net debt-to-equity ratio as the company has been reducing its leverage over the past five years. AIZ’s debt is well-covered by operating cash flow, while interest payments are covered by EBIT many times over.
Rating company AM Best has recently applauded the company’s balance sheet strength, supported by risk-adjusted capitalization at the strongest level. The agency praised AIZ’s “very strong earnings power, strong positive cash flows, and new capital formation–the majority of which is derived from low-risk businesses, with limited volatility.”
According to AM Best, Assurant boasts “strong operating performance, favorable business profile, and appropriate enterprise risk management (ERM).” Its operating excellence has benefitted from revenue stream diversification and long-term partnerships with market leaders in all of its end markets. These strengths have helped Assurant to decisively outperform its competitors, as well provide in outstanding returns on capital.
Financial Performance: Surpassing Expectations
Over the past five years, AIZ’s revenues have increased at a CAGR of 7%, while its earnings-per-share surged at a CAGR of 24.6%.
The company released its latest financial results on February 6, reporting for Q4 and full-year 2023. The report featured a strong beat on revenue and earnings expectations. The latest quarter was the fifth consecutive period when actual earnings results surpassed expectations.
2023 was the seventh consecutive year of earnings growth. For the full year, Assurant reported a 21% increase in adjusted EBITDA and a 26% growth in adjusted EPS. The company generated net cash of $733 million. The main driver of returns was the Global Housing segment, where adjusted EBITDA surged by 64%. In the Global Life segment, the Connected Living subsegment (mobile and appliances) has seen slight growth, while the Automotive subsector subtracted from the overall growth.
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Shareholder Alignment: 360º Returns
Assurant has a balanced capital allocation strategy, based on three pillars:
¤ Organic investments, including digitization, new partnerships, etc.; and M&A investments. These investments allow the company to expand its presence, gain market share, and retain customers.
¤ Common stock dividends, which have consistently increased for 19 years. Although AIZ’s current dividend yield is low for a financial company at 1.6%, its long-term track record, coupled with the company’s stated commitment to shareholder compensation, provides hopes for an outlook of dividend growth for years to come.
¤ Share repurchases: since its IPO in 2004, the company has bought back ~70% of its outstanding stock. In 2023, Assurant performed buybacks in the amount of $200 million. In November, the company approved a new repurchase program for up to $600 million of its outstanding common stock.
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Stock Performance and Valuation
AIZ stock has gained ~45% in the past three years, resulting from a strong fall from an all-time high reached in April 2022, and a subsequent surge in 2023. In the past 12 months, the stock gained over 40%, spurred by strong financial results in recent quarters.
Despite the recent run-up, the stock’s valuation remains more than reasonable. While AIZ trades at a premium compared to the overall Financial sector, its valuation is similar to the average for the Insurance industry, and lower than most of its comparable peers. In addition, based on projected cash flows, the stock is trading ~50% lower than its fair value, placing it firmly in the value stock category.
TipRanks-scored top Wall Street analysts see an average upside of 12.2% for the stock over the next 12 months. AIZ carries a TipRanks Smart Score rating of 9/10 (“Outperform”) with a “Strong Buy” recommendation:
Conclusion
Assurant, Inc. is a stable, reliable, financially robust specialty insurer with strong market positions in its niches and well-diversified revenue streams. The company’s strong financial performance and moderate valuation make it appealing to investors, while its alignment with shareholder interests makes it an attractive long-term investment opportunity. As such, we believe it can be a valuable addition to the Smart Investor portfolio.
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Portfolio Stocks Under Review
In this section, we will flag stocks that may be let go from the portfolio.
¤ UnitedHealth (UNH): The healthcare giant is placed under review with medium-high urgency due to two recent negative developments. First, Moody’s Investors Service said the cyberattack reported by the company last Thursday was “credit negative”. The credit rating agency said that the attack could have “financial and reputational impacts,” as many pharmacies are reporting problems in fulfilling prescriptions due to the disruptions from the attack. On the other hand, rating agency Fitch said the incident is not expected to impact UnitedHealth’s ratings. In addition to the cyberattack, UNH the Justice Department has launched an antitrust investigation into the health-insurance giant, reviewing the relationship between the company’s insurance and health-services units. We will be closely watching the developments to determine whether they could impact UNH’s financial performance.
¤ Electronic Arts (EA): The videogame company remains under review for potential sale with low urgency, as we continue to watch the trends in gaming sales, which depend on the overall economic situation. EA is a financially healthy, well-run company, but its 2024 growth prospects depend on the market rebounding from last year’s weakness.
¤ General Electric (GE): The soon-to-be former industrial conglomerate remains under review for potential sale with low urgency. The stock has risen over 80% over the past 12 months, and recently hit a six-year high. GE shares are now trading at a very overvalued level, which leaves it with limited further upside while increasing the risk of correction. In addition, the impending spin-off of GE Vernova and the firm’s ceasing to be a conglomerate – instead becoming a pure-play aviation and defense company – will force analysts to reevaluate the stock. This could lead to increased volatility and spark a post-split sell-off.
Charter Members of the 30% Winners Club
*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Our exclusive club’s ranks have expanded again. The Winners Club now includes 15 stocks: SMCI, GE, AVGO, ANET, CDW, AMAT, STLA, ULTA, TSM, ORCL, MOH, GD, EME, PH, and JBL.
The next in line to enter the Winners’ ranks is still Check Point (CHKP) with 26.9% gain since purchase. Will it close the gap, or will someone else outrun it to the finish line?
What’s Next?
Our next commentary will come out on Wednesday, March 6th, before the market opens.
Until then – we wish you a world of investment success!
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
