Selling Sureness
The global economy has hit a rough patch, and the outlook is highly uncertain. In times like these, everyone – be it an individual, a small business, or a massive corporation – is looking for security; everyone is more conscientious about safeguarding their future.
And this is where the importance of insurance and reinsurance truly shines out. The insurance and reinsurance sectors are fields where the ability to predict, manage, and mitigate risks can spell the difference between prosperity and decline.
Insurance isn’t just a policy document; it’s a safety net. However, to serve as that safety net, an insurer must broadcast impeccable stability, supported by strong finances and a flawless reputation. In these uncertain times, people and firms are ready to pay a high premium for an insurer that demonstrates quality and reliability, as these are invaluable traits.
Today, we are adding one such business to our Smart Investor holdings. With its robust financials, consistent growth patterns, and an optimistic future outlook, this titan of the reinsurance world provides a masterclass on how to thrive in an unpredictable global economy.
But first, let us delve into a short update on the economy and markets, and the Smart Investor calendar.
Economy and Markets: Looking Forward
There are several important reports scheduled to be published in the next few days.
- Later today, we will receive September’s ISM Services PMI report, which shows business conditions in the U.S. manufacturing sector. It is a significant indicator of the overall economic conditions. PMIs are considered to be one of the most reliable leading indicators for assessing the state of the U.S. economy, helping analysts and economists to correctly anticipate changing economic trends.
- On Friday, we will get the reports on September’s Nonfarm Payrolls and Unemployment Rate. These reports present the number of new jobs created during the previous month, and the percentage of people who were actively seeking employment in the previous month. These reports are considered two of the most important economic indicators, as policymakers follow the shift in the number of positions since it is strongly associated with the health of the economy as a whole. One of the mandates of the Federal Reserve is full employment, and it takes labor market changes into account when determining its policy decisions, which influence the capital markets.
As for the stock calendar, the Q2 2023 earnings season for Smart Investor Portfolio companies is almost finished, but there are still incoming reports from firms whose fiscal year is shaped differently. The fiscal Q1 2024 report for Lamb Weston Holdings (LW) is scheduled to be released tomorrow.
The ex-dividend dates for General Dynamics (GD), Oracle (ORCL), and Accenture (ACN) are coming in the next several days.
Today, we are adding the stock of a long-standing reinsurance market leader. The company we are adding has been growing earnings at a fast clip, and its long-term prospects are outstanding, despite the volatility of its industry.
To make room for this valuable addition, we are letting go of the world’s largest lithium producer, whose stock may continue to decline because of the tumbling prices of the metal.
New Addition: Everest Group (EG)
Everest Group Ltd., (formerly Everest Re Group) is a global insurance and reinsurance provider. Through its subsidiaries, the company offers a range of property and casualty reinsurance, insurance products, and related services. It offers insurance coverage in areas such as casualty, energy, specialty, credit, and financial lines. EG is one of the world’s largest reinsurers, offering, through a global network of affiliates, property, casualty, marine, and aviation, surety, credit, and other types of reinsurance.
Everest is headquartered in Hamilton, Bermuda. The company offers its services to customers in more than 100 countries in the Americas, Europe, Middle East, Africa, Asia and the Pacific. Despite EG’s wide services portfolio and geographical diversification, the majority of the company’s revenue is derived from its U.S. Reinsurance operations.
Everest Group Ltd. was founded in 1973 as Prudential Reinsurance, a subsidiary of Prudential Financial (PRU). The company became independent in 1995, changing its name to “Everest Re” and completing an IPO on the New York Stock Exchange (NYSE). EG became an S&P 500 (SPX) component in 2017.
Today, EG is a large-cap company, with a market capitalization of $16.1 billion, annual revenues of over $12 billion, and a workforce of 2,500 employees. Its financial health is very robust, with a low debt-to-equity ratio of 28% and more cash than its total debt. A quick ratio of 1.2 and a current ratio of 1.6 indicate a very healthy level of liquidity. The company’s strong financial position is underscored by its high credit ratings (“A-“ at S&P Ratings and “Baa1” at Moody’s).
Everest’s Return on Equity (ROE) of 12.1% may seem low, however, it compares favorably with the average of 4.5% for the reinsurance industry. Its Return on Assets (ROA) of 3.5% is also higher than the industry’s average of 2.7%. EG’s industry-beating profitability is also reflected in its operating margin of 21% and net profit margin of 18.5%, which are much higher than the average in its industry.
Insurance and reinsurance income is normally highly volatile. That’s why the fact that the company has managed to grow its revenues for four consecutive quarters, and its EPS for three quarters in a row, is outstanding.
In Q2 2023, Everest’s revenues increased by 24% year-on-year, while earnings-per-share surged by over 55%. The company reported a record operating income of $670 million driven by continued underwriting margin improvement. In the past three years, EG’s revenues rose at a CAGR of 10.1%, while net income grew at a CAGR of 34.3%, and EPS at a CAGR of 36.1%.
At the end of the last quarter, the management disclosed that EG has renewed almost all of its portfolio at significantly improved rates and terms, so the outlook for the current and next quarter, as well as for 2024, is very positive. The optimistic outlook is underpinned by the global “flight to quality,” as in current unstable economic conditions the customers prefer established, long-standing market leaders, even if that means paying higher premiums.
Everest’s robust finances, successful delivery, and robust earnings growth outlook have been reflected in the stock’s outperformance. EG’s stock has brought its investors an outsized gain of 87% in the past three years, compared to the S&P 500’s increase of 26%. In the past 12 months, the stock has risen by 40%, while the SPX gained 15%.
As a result, Everest’s stock is trading at higher valuations than the Financial sector’s median. The stock is now trading at a TTM P/E of 12.4, representing about a 35% premium to the sector average, while its Forward P/E of 9 is in line with that of its sector. When compared with its peers in the U.S. Insurance industry, EG’s valuations don’t look that high, as its TTM P/E is slightly lower than the peer average.
Notably, in addition to the stock price appreciation, Everest rewards its shareholders through dividends. Although its current dividend yield of 1.8% is lower than the average for its sector, the company has been growing its cash payouts for 15 years and is expected to continue doing so for years to come. This outlook is supported by the company’s strong profitability metrics, stellar balance sheet, and low payout ratio of 20%. The latest dividend increase was in September 2023, when the payout rose by 6%.
TipRanks-scored top analysts foresee an average upside of 20.5% for the stock in the next 12 months. Everest carries a “Perfect 10” Smart Score rating on TipRanks with a “Strong Buy” recommendation:
To conclude, we view Everest Group Ltd. as a winning combination of quality and growth. Its stellar finances, outstanding earnings growth, solid execution of strategy, and bright outlook make it a valuable addition to the Smart Investor portfolio.
New Deletion: Albemarle Corp. (ALB)
Albemarle Corp. is one of the largest global producers of chemicals for consumer electronics, petroleum refining, utilities, packaging, construction, transportation, pharmaceuticals, crop production, food safety, and custom chemistry services. Despite the company’s wide product diversification, it is best known as the world’s largest lithium producer.
The company is a Fortune 500 list member; it has a large market cap of $25.9B. It has stellar finances, low debt, and outstanding profitability metrics. ALB has surpassed analysts’ EPS estimates for 14 consecutive quarters and is expected to continue its stellar performance in the future.
Despite all this, the company’s stock has tumbled by over 25% year-to-date, strongly underperforming its peers as represented by the Materials Select Sector SPDR Fund (XLB). That’s because investor sentiment toward the stock is tightly tied to lithium prices, which have tumbled significantly in the past year.
Although a large part of Albemarle’s sales are placed through long-term contracts, meaning its revenues are relatively protected from the decline of lithium prices, the negative sentiment toward the stock continues to persist.
Moreover, the short-term outlook for lithium prices is highly negative. China, the world’s largest buyer of lithium for electric vehicle production, is experiencing a pronounced economic downturn, leading to a sharp drop in EV sales. Meanwhile, Chinese EV battery makers still hold high inventories of the metal, further depressing demand.
Notably, the long-term outlook for Albemarle is extremely positive, given its position as the world’s main supplier of EV battery metal, and the prospects of global transition to electric vehicles in the next decade. However, the company’s stock may experience sharp volatility on the way to this bright future. While we may revisit ALB in a while, at the moment we find it prudent to cut the losses and sell the stock at this point.
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.
The stock market has continued to struggle in the past week, leaving little chance for our Winners Club to expand. The exclusive club’s ranks still count only two stocks, GE and TECK, as the stocks that fell beyond the threshold last week are still hanging slightly below the 30% line.
The following stocks have fallen from grace but are still the closest contenders for a comeback: AVGO with 29.2% gain from purchase, ORCL with 28.3%, and CDW with 27.6%. Will they be able to close these narrow gaps, or will someone else outrun them to the finish line?
What’s Next?
Our next commentary will come out on Wednesday, October 11th, 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.
