Travelers Stock Has Reached Its Near Term Potential
[Updated 12/10/2020] Travelers Update
After a 54% rally since the March bottom, at the current price near $135 per share, we believe Travelers’ stock (NYSE: TRV) has reached its near term potential. TRV stock has increased from $88 to $135 off the recent bottom compared to the S&P 500 which increased almost 65%. The stock is currently around the same level as it was at the end of 2019, and is lagging the broader market. This is because investors are cautious about the impact of lower investment yield on their net investment income, as income generated by investing insurance premiums is very important for the profitability of an insurance company. Travelers’ revenues have grown a meager 1% to a consolidated figure of $23.6 billion for the last 3 quarters from the consolidated figure of $23.5 billion for the year-ago period. It includes a 16% drop in net investment income over the same period.
TRV recently released its third-quarter results, outperforming the consensus estimates. It reported net revenues of $8.3 billion – 3% more than the year-ago period, mainly driven by a similar growth in total premiums. However, its business insurance segment – which contributed around 50% of total revenues in 2019, has reported a slight drop in consolidated revenues for the first three quarters of 2020. Due to the Covid-19 crisis, businesses and individuals have suffered losses. It has caused a shift in focus from long term to short term survivability. Hence, it is unlikely that Travelers would see significant growth in its total premium amount over the coming months. Further, the investment yield has suffered in the current year due to the economic slowdown and is unlikely to see an immediate recovery, hindering Travelers’ revenue growth prospects. Besides, TRV’s P/E multiple changed from close to 13x in 2018 to around 14x in 2019. The company’s current P/E is just below 14x, which leaves limited scope for improvement. Our dashboard Buy Or Sell Travelers Stock? provides the key numbers behind our thinking.
[Updated 9/22/2020] Up 20%, Travelers Stock Has Further Upside Potential
Despite a 24% rise since the March 23 lows of this year, at the current price of around $109 per share we believe Travelers stock (NYSE: TRV) still has some growth potential. Travelers, the Property & Casualty (P&C) insurance giant, has seen its stock rally from $88 to $109 off the recent bottom compared to the S&P which moved around 45%. While investor sentiment toward insurance companies has overall improved over the recent months, Travelers is still lagging the broader market as investors are overly cautious about the impact of lower consumer demand on business and personal insurance premiums which contributes a significant revenue share. Notably, the stock market has seen some negative movement since September 2nd due to a spell of profit-booking after a strong run – Travelers’ stock is down 7%. Further, the stock is down 20% from levels seen at the end of FY 2019.
Travelers’ stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the rise since the March 23 lows, we feel that the company’s stock still has some potential as its valuation implies it has further to go.
Some of this rise of the last 3 years is justified by the roughly 14% growth seen in Travelers’ revenue from 2016 to 2019, which translated into a 13% growth in Net Income figure. Notably, the net income margin decreased from around 11% in 2016 to roughly 8% in 2019, as claims and claim adjustment expenses increased in terms of % of revenues.
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While the company has seen steady revenue growth over recent years, its P/E multiple has increased. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove 20% Change in Travelers Stock between 2016 and 2019? has the underlying numbers.
Travelers’ P/E multiple changed from around 11x in FY 2016 to just below 14x at the end of FY 2019. While the company’s P/E is close to 11x now, there is an upside when the current P/E is compared to levels seen in the past years – P/E of around 14x at the end of FY 2019 and just above 12x at the end of FY 2018.
So what’s the likely trigger and timing for further upside?
Travelers is the sixth-largest property and casualty (P&C) insurance company in the United States – based on direct written premiums. Due to the ongoing pandemic, insurance premiums are likely to be lower as customers and businesses would be more focused on the short term survivability. Further, income from investment of insurance premiums – which is very important for the profitability of any insurance company – has suffered in the second quarter due to lower yields driven by the economic slowdown. However, the economy is likely to see some recovery in the third quarter. This is also validated from the recently released consumer spending data which suggests an m-o-m growth of 8.5%, 5.6%, and 1.9% in May, June, and July respectively. This means that, if the same trend continues, it is likely to improve the total premiums and net investment income, benefiting the Travelers’ revenue trajectory over the coming months.
Further, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.
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