Will Alleghany Stock Recover To Its Pre-Covid Level?

Alleghany Corporation stock (NYSE: Y) currently trades at $628 per share, approximately 25% below its pre-Covid-19 peak, and seems like a good investment opportunity. Alleghany, which mainly offers property and casualty (P&C) reinsurance and insurance services, saw its stock trading over $839 in February 2020 just before the outbreak of the pandemic and is still almost 25% below that level. The stock has gained 39% since its March lows of 2020 compared to the S&P 500 which doubled during this period. Despite the gradual lifting of the lockdown and successful vaccine rollout, leading to improvement in Alleghany’s revenues over recent quarters, the stock has gained a meager 4% YTD. The negative investor sentiment toward the stock is due to the expectations of an above-average hurricane season this year, resulting in higher claims for the company.

Returning to the pre-Covid level means that Y stock will have to increase by 34% from here. We do believe that the upside is possible in the near term, once the investment yields recover close to the pre-Covid-19 levels. Further, the gradual improvement in the economic conditions will likely boost both the total premiums and the non-insurance revenues. Notably, the revenues grew 50% y-o-y to $5.6 billion in the first half of 2021 driven by a 19% growth in net earned premiums and a 63% jump in non-insurance revenues. Overall, consistent improvement in the economy is likely to drive an upside of around 34% in the stock in the near term, making it a good investment opportunity.

But pre-Covid-19 levels can be attained only once the investment yields improve and the economic recovery is not hindered by a sudden uptick in the Covid-19 cases. Our conclusion is based on the detailed comparison of Alleghany’s stock during the 2008 recession vs. now in our dashboard analysis.

Covid-19 Crisis

Timeline of Covid-19 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 96% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections..

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In contrast, here’s how Y stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Y and S&P 500 Performance During 2007-08 Crisis

We see Y stock declined from levels of over $386 in September 2007 (pre-crisis peak) to levels of around $257 in March 2009 (as the markets bottomed out), implying Y stock lost 33% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $271 in early 2010, rising by 5% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Y Fundamentals Over Recent Years

Alleghany revenues increased from $6.4 billion in 2017 to $9 billion in 2019, primarily due to higher total premiums and growth in non-insurance revenues. This translated into earnings of $59.44 – up from $5.85. However, the company’s revenues slightly dropped in 2020, coming in at only $8.9 billion, due to lower net investment income and a decrease in the fair value of equity securities from $710 million to around -$111 million. Y reported basic EPS of $7.14 per share during the year. Notably, the EPS was unusually high in 2019 due to lower net loss and loss adjusted expenses as a % of revenues.

Does Y Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Alleghany’s total debt (Senior Notes and other debt) increased from $1.5 billion in 2017 to $2.1 billion in 2020, while its total cash (cash plus short-term investments) increased from around $1.4 billion to $1.5 billion over the same period. Further, the company reported a cash outflow of $1.3 billion from investments and a cash inflow of $1 billion from operating activity. Overall, the company has a strong cash inflow from operations and a comfortable cash cushion to meet its obligations in the near term.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
  • October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
  • Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Despite a rise inthe number of new Covid-19 cases in the U.S., we expect a gradual improvement in demand to buoy market expectations. As investors focus their attention on expected full-year 2021 and 2022 results, we believe Alleghany stock has the potential for full recovery once fears surrounding the Covid-19 pandemic are put to rest.

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