Aetna and Allstate: Insured Potential
11/14/2013 7:00 am EST
We focus on broadly diversified investments in undervalued stocks for their long-term appreciation potential; here's a look at two of our latest featured ideas, both in the insurance sector, suggests John Buckingham in The Prudent Speculator.
Aetna (AET) is one of the largest managed care organizations, covering almost 22 million members and focusing on three segments: Health Care, Group Insurance, and Large Case Pension.
The firm recently announced Q3 results that slightly missed analyst expectations, including adjusted earnings of $1.50 per share on $13 billion of revenue.
Although investors were a bit disappointed, we were pleased to see that management maintained its full year earnings guidance of $5.80 to $5.90 per share. The low end of the estimate range in mind, AET shares are currently trading with a forward earnings multiple of less than 11.
While there might be a few operating potholes in the managed health care space, we think Aetna offers attractive long-term upside, as it enjoys accretive benefits from its Coventry Health Care acquisition, and takes advantage of its scale and financial flexibility.
We also like the company's diverse product lines, improving margins in two of its underperforming units, better pricing discipline, cost control initiatives, and share buybacks.
Allstate (ALL) is the largest publicly-traded personal lines insurance company in the US, with approximately 12% of the personal lines market.
Primarily a direct writer of a full array of property and casualty products (preferred, standard and nonstandard auto insurance, and homeowners' insurance), Allstate also offers life insurance and annuities.
The firm's products are sold in North America by more than 10,000 exclusive Allstate agents, as well as, by independent agents, banks, and insurance brokers. Q3 earnings per share of $1.53 easily surpassed analyst expectations of $1.44.
We also note that the underlying operating performance was even stronger, as the firm had to take charges related to previously discontinued lines and pension costs, equating to $0.29 per share.
We are confident that Allstate is well-positioned for the long-term, thanks to its vast distribution network, scale, and resulting cost advantages, pricing sophistication, and product design. Its personal auto insurance business continues to generate attractive returns, and the fundamentals in homeowners' insurance are improving.
ALL still has approximately $589 million remaining on its share repurchase program. Allstate shares carry a 1.9% dividend yield and are trading at ten times consensus earnings estimates, the latter well below the multiple of its peer group.
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