Dow Component Travelers (NYSE:TRV) has the largest market capitalization of any property and casualty insurance company in the United States. The share price is up over 22% year over year and 22.56% year to date and yet on October 3rd 2012 Goldman Sachs bumped TRV from its Conviction Buy list, leaving it with a BUY rating and a $75 dollar price target.
So what should investors be thinking about Travelers? Is the stock a BUY, a WAIT and SEE, or a STAY AWAY?
Let’s analyze TRV with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
The traditional view of catalysts for stock price movement is an event that yields an immediate and sometimes dramatic shift in share price upward or downward. Earnings surprises both positive and negative are frequent catalysts as are press releases about specific events of macroeconomic issues that could affect the company and hence its stock.
However, if you look at the chemistry origins of the term catalyst, it is a substance that “provokes or accelerates” change. Investors would do well to broaden their concept of catalysts to include the possibility of change over time rather than an immediately obvious change. Under that scenario, there is a potential longer term catalyst for TRV that bears mentioning.
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Travelers derives almost 60% of its revenue from the business and financial segment and small to medium enterprises, or SMEs, represent a major portion of that revenue. In the current economic climate, SMEs are less concerned with Travelers superior customer service because it comes at a premium price. TRV has lost market share as small business owners look for less costly alternative. Any improvement in business conditions there could act as a moderate catalyst for Travelers.
E = Equity to Debt Ratio is Close to Zero
Travelers has a low debt to equity ratio of 0.25, substantially better than the debt to equity at competitors American International Group (NYSE:AIG) at 0.71 and Hartford Financial Services Group (NYSE:HIG) at 0.34.
T = Technicals on the Stock Chart are Strong
As of October 31st 2012 the stock’s simple moving averages are looking pretty good. The stock price is .13% above its 20 Day SMA; 3.98% above the 50 Day SMA; and 13.71% above the 200 Day SMA. However, the relative strength indicator, or RSI, is in moderate territory with a value of 55.
S = Support is Provided by Institutional Investors & Company Insiders
Travelers is 85% institutionally owned, making it one of the highest percentage institutionally held stocks in the Dow 30. The top five holders are Southeastern Asset Management, Vanguard Group, BlackRockInstitutional Trust, Neuberger Berman Group, and Massachusetts Financial Services
E = Earnings Are Increasing Quarter over Quarter
Travelers really shines on this metric with a whopping 244% increase in earnings per share quarter over quarter. In comparison, major rival AIG saw a 29.6% drop in earnings per share quarter over quarter while Hartford saw an equally outsized change with a 219.8% decrease in EPS quarter over quarter.
E = Excellent Relative Performance to Peers
With the exception of Return on Equity, Travelers outperforms both AIG and HIG. AIG’s ROE of 21.58% bests TRV’s of 8.97% and Hartford’s of 0.37%. Operating margins of 10.95% at Travelers surpass operating margins of 7.37% at AIG and a negative 1.16% ROE at Hartford. While all three companies saw negative EPS growth over the past 5 years, Travelers was by far the “best of the worst” with a negative 10.66% compared to a negative 39.6% for AIG and a negative 33.65% at Hartford.
T = Trends Support the Industry in which the Company Operates
A recent report from the world’s largest reinsurer, Munich Re, points to a very disturbing trend for property and casualty insurers – weather related natural disasters. According to their report, “the number of natural disasters per year has been rising dramatically on all continents since 1980, but the trend is steepest for North America where countries have been battered by hurricanes, tornadoes, floods, searing heat and drought.”
If you believe climate change and global warming is all a hoax perpetrated by Al Gore and assorted wild-eyed environmentalist wackos, you might want to take a deep breath and think like an investor not an ideologue.
Investing is all about risk and certainty. Munich Re is a for-profit company that believes climate change is real and poses a major problem for the insurance industry world-wide. You can find those who disagree with Munich Re and a USA Today press release on Munich’s findings cited French reinsurer AXA as disagreeing with Munich Re’s conclusions.
Yet a visit to AXA’s Corporate Website reveals the following about the company’s position on climate change:
- · Climate change is a fact.
- · This change is being caused by the combination of natural variability and human-induced phenomena.
- · The acceleration of this trend could bring about potentially dangerous extreme phenomena. Any actions looking to reduce causes linked to human activity are to be promoted.
- · For AXA, the potentially dangerous climatic extremes primarily concern 1) a repetition of the storms seen in Europe, with increasing damage due to quicker wind speeds and higher storm tides, and 2) a significant increase in flooding, essentially in the UK, with even London significantly at risk.
An objective and dispassionate view of the situation screams uncertainty. As an investor, are you certain climate change deniers are right? It the Reinsurance industry warnings are right, it seems clear that TRV and its property and casualty peers merit a WAIT AND SEE posture.
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