2012-07-17 11:25:23Cuts in earnings estimates in the second quarter from the insurance sector are forecasted based on disappointing first-quarter earnings reports, lower interest rates and relatively weak equity markets, says Joanne A. Smith, CFA, a Director and Senior Equity Analyst at Scotia Capital.
"I was expecting a lot more upside surprises than were delivered. There were only four companies in my universe of stocks that actually outperformed expectations, and there were four disappointments," she said, "and then, there were two that met expectations, and I was expecting more positive results, part of which was due to some adverse mortality."
Smith has Aflac Inc. (AFL) as a top pick in her coverage universe as the company has always traded at a significant premium to the peer group, given it produces exceptional profits. She says Aflac has had a track record up until the past couple of years of generating double-digit earnings growth while delivering ROEs that are well above 20%.
"The problem with Aflac right now is that it has become a little bit more complex. People used to love it for its simplicity, and it's not as simple as it once was," Smith said. "But I think that once investors are able to digest some of the changes that have taken place at the company and realize that it has not strayed materially from its traditional strategies and core strengths, that the stock will regain its ground."
2012-07-16 10:46:56The connector segment within the electronic components sector is expected to benefit from increased automation in the automotive and industrial spaces as companies move to cut costs over time, says Michael J. Wherley, an Analyst at Janney Montgomery Scott LLC.
"The main driver for the connectors industry is increasing electrification of pretty much everything. So whether that's in automotive, with all the different devices that go into cars today," he said, "whether its in industrial automation, where the price in labor has been increasing pretty dramatically in large chunk in China over the last five years."
Wherley favors Amphenol Corporation (APH) due to its decentralized model with 75 business units that operate independently, which is different than most large, multinational companies. He also likes Amphenol because of its 16% compound annual growth in the past decade, versus the top 10 companies in the connectors industry at 6.3%.
"As it all grows, the question is 'Can they maintain this performance even if they double in size in the next five years?'," Wherley said. "But we believe that they have a model that works and we believe, at least for the near to midterm, that this model works very well, and there's no reason to doubt that they can't keep working."
2012-07-13 11:33:36Investors should look to insurance companies with more stable income due to uncertainty over how long favorable reserve development in the industry is expected to continue, says Robert Farnam, a Senior Vice President at Keefe, Bruyette & Woods, Inc.
"Workers' compensation is actually a line, one of the largest commercial lines, and I think that that line is deficient. So you've already started to see some companies reporting adverse development there," he said. "A lot of the commercial lines, I think, kind of the casualty lines, have questionable reserve adequacy, which could lead to adverse development going forward."
Farnam has an "outperform" rating on Maiden Holdings, Ltd. (MHLD), a smaller Bermuda reinsurance company. He says the benefit of Maiden is that it's different from other Bermuda reinsurance companies because it does not write property catastrophe risk, so its earnings are more stable.
"Their issue right now is that they are still sitting on too much cash. I think they still have to try to put that to work in this weak environment though. But stability is the key for them," Farnam said. "I think they haven't had a combined ratio out of the 90s since they've been in existence. So I think it's attractively valued relative to what its performance expectations are."
2012-07-12 14:12:34Investors need to look at those insurance companies that have catalysts ahead of them, because these events may boost ROE despite the low interest rate environment and choppy equity market, says Sean Dargan, a Vice President and Senior Analyst at Macquarie Group Limited.
"Both of these headwinds certainly impact some companies more than others. To a certain degree, low interest rates negatively impact all insurance companies, but some are impacted less than others," he said. "And the equity market performance does not impact those companies that are not large sellers of variable annuities or investment-management-type products."
Dargan recommends MetLife, Inc. (MET), which is currently trading around 65% to book value, and is expected to to earn about 11% ROE. He says MET has catalysts on the horizon due to uncertainty about the regulatory environment surrounding the company and its ability to engage in capital management.
"So I think there is a catalyst ahead for this company in that it's going to complete the sale of its bank deposits to GE Capital, which should allow the company to relinquish its bank holding company charter," said Dargan, "which in turn should allow the company to no longer be regulated as a bank holding company by the Fed, and allow the company to raise its dividend and start buying back its stock."
2012-07-11 11:18:44With valuations under pressure and the market skeptical of any growth stories in the electronic components sector, investors need to find companies that offer extreme valuations, confidence in management and operating leverage opportunities, says Steven Fox, CFA, a Managing Director at Cross Research LLC.
"In terms of how we are differentiating our stock picks, generally, we are looking for extreme valuation cases, obviously, because there are a lot of stocks in my group that have seen valuations cut, so below industry average EV to EBITDA, p/e multiples, positive cash flows, cash flow yields, etc.," he said.
Fox likes TE Connectivity Ltd. (TEL), a connector company, because it is a well-run business with 35% of its sales focused on auto markets, which seems to have some good trends ahead of it, and TEL is the leader in auto connectors. He says the company also has outsized market share in auto connectors and tends to make good margins on its auto products.
"TEL also offers high incremental margins, in general. So on slow growth, we think they can improve their margins at a faster rate than sales," Fox said. "Additionally, TEL just acquired a company called Deutsch, which turns them into a leading position in the military and commercial aerospace connector market, while expanding their opportunity in harsh environment connectors used in industrial applications."