With shares of The Allstate Corporation (NYSE:ALL) at $40.15 per share during Monday’s stock market closure due to Hurricane Sandy, is ALL a BUY, a WAIT and SEE, or a STAY AWAY?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Allstate stock is currently at the mercy of the most volatile and unpredictable of all forces: Mother Nature. Hurricane Sandy is barreling towards major Eastern cities like New York, Boston, and Philadelphia, threatening to wreak havoc and billions of dollars of damage.
If the destruction measures up to the hype and substantial damage is inflicted on homes, businesses, and cars across the East Coast, expensive claims could begin raining down on Allstate in the months following the storm, a possibility that will very likely effect investor behavior.
Additionally, the insurer is set to announce its third-quarter earnings on Wednesday, October 31, and Wall Street analysts are expecting big things from the nation’s largest insurance provider, including a sevenfold rise in actual earnings from the same quarter one year ago. If Allstate meets or beats the lofty expectations, its stock could be rewarded by a handsome boost. Yet, missing those projections could send investors running for the hills.
T = Technicals on the Stock Chart are Strong
As of October 29, 2012, the stock price is 2.16 percent below its 20Day Simple Moving Average; 1.42 percent above the 50 Day SMA; and 16.53 percent above the 200 Day SMA. Since the beginning of 2012 the stock price has been in a healthy upward trend and is up 49.37 percent year-to-date and up 48.92 percent year over year.
E = Earnings Are Generally Increasing Quarter over Quarter
Allstate’s earnings have increased for the most part over the last four quarters. The most recent quarterly number of 86 cents per share showed a drop-off from the previous quarter’s $1.53 per share, but the previous three quarters had all enjoyed increases in EPS and the most recent quarter’s mark still represented a massive improvement from the year previous, when net losses of $1.19 were suffered.
It can’t be overlooked that Allstate’s earnings have beaten analysts’ expectations and revenue has increased steadily in each of the last four quarters.
Since earnings are definitely increasing in the right direction quarter-over-quarter, the stock is within our risk portfolio.
E = Excellent Relative Performance to Peers is NOT Demonstrated
Many investors favor Return on Equity as a key metric to how well the company is operating. Allstate’s operational performance is towards the back of the pack when compared to peer companies. ALL has an ROE of 10.87 percent while rivals Travelers Companies (NYSE:TRV) and Progressive Corp. (NYSE:PGR) come in around or slightly above that at 10.83 percent and 14.71 percent, respectively. American International Group (NYSE:AIG) is even further ahead with an ROE of 21.58 percent.
Operating margins are also critical for stock evaluation. Allstate doesn’t distinguish itself from the competition here, either, with a margin of 8.94 percent compared to 7.37 percent for AIG, 8.14 percent for Progressive, and 14.17 percent for Travelers.
T = Trends Affecting the Industry in which the Company Operates are Currently Difficult to Predict
The damage done by natural disasters and the resultant effect on insurance companies like Allstate are notoriously difficult to anticipate. In 2005, Hurricane Katrina dealt out devastating damages that reached $105 billion and sent Allstate shares falling from $58.27 per share to $54.53 per share in the month following the destruction. However, in contrast, 2003’s Hurricane Isabel, which delivered far more modest damages of $3.6 billion, actually drove up Allstate stock during the month following the storm.
Some analysts are already predicting that Sandy will lean more towards the Isabel side of the spectrum, and that associated costs for insurance companies like Allstate will be manageable. Still, Allstate has homeowners insurance exposure of 13.8 percent to Hurricane Sandy, and auto insurance exposure of 15.5 percent, and it seems too soon to declare the impending claims as nothing to worry about.
Also, while the hugely optimistic expectations for Allstate’s earnings release later this week sound nice, they leave the company’s stock ripe for a fall if somehow earnings fail to meet their projected levels.
All this considered, the potential cons for Allstate stock seem to outweigh any pros. It looks like for now Allstate is a STAY AWAY based on the key metrics above.
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