Hartford Financial stock (NYSE: HIG) lost more than 50% – dropping from $61 at the end of 2019 to around $31 in late March – then spiked 32% to around $40 now. But that means it’s still 34% lower than where it started the year!
This can be attributed to 2 factors. The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plunged. This could lead to lower investment yields and a drop in investment premiums due to a shift in customer focus from long term to near term survival, weighing on Hartford Financial’s top line. However, the multi-billion-dollar Fed stimulus in late March helped arrest the negative market sentiment, which is also evident from the stock recovery after that point.
But we believe there is more upside to come over the coming months
Trefis estimates Hartford Financial’s valuation to be around $52 per share – about 30% above the current market price – based on an upcoming trigger explained below and one risk factor.
The trigger is an improved trajectory for Hartford Financial’s revenues over the second half of the year. We expect the company to report $20.1 billion in revenues for 2020 – around 3% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to see some recovery in Q3. The recently released U.S consumer spending data also indicates a m-o-m growth of 8.5%, 5.6%, and 1.9% in May, June, and July respectively, which indicates a growth trend. If the momentum continues, it is likely to boost the net premiums amount and income from investment of insurance premiums – which is very critical for the profitability of any insurance company. This, in turn, would benefit the revenue trajectory over the coming months. The net income for the year is expected to drop to $1.7 billion – down 19% y-o-y, reducing the EPS figure to $4.76 for FY2020.
Subsequently, Hartford Financial’s revenues are expected to improve to $20.7 billion in FY2021, mainly driven by slight growth in commercial property & casualty and the group life insurance segment. Further, the net income margin is likely to see some recovery, leading to an EPS of $5.26 for FY2021.
Finally, how much should the market pay per dollar of Hartford Financial’s earnings? Well, to earn close to $5.26 per year from a bank, you’d have to deposit around $580 in a savings account today, so about 110x the desired earnings. At Hartford Financial’s current share price of roughly $40, we are talking about a P/E multiple of just below 8x. And we think a figure closer to 10x will be appropriate.
That said, the insurance business has some uncertainty right now. Growth looks less promising, and near-term forecasts are less than rosy. What’s behind that?
Hartford is one of the largest providers of property and casualty insurance products and life insurance products in the U.S. It has around $36.5 billion in identifiable assets between its property & casualty and group insurance segments (as per FY 2019 data). The company drives around 11% of its total revenues from income generated by the investment of insurance premiums. Therefore, its business model is very sensitive toward movement in investment yields. While the S&P 500 index is on a growth trajectory (up 55%) since the March bottom, any further weakening in the economic condition or an unanticipated uptick in the Covid-19 case count can reverse the momentum and could negatively affect HIG’s revenues.
The same trend is visible across Hartford Financial’s peer – Prudential Financial. Its revenues are also likely to suffer in FY2020 due to lower premiums and a drop in investment income. This would explain why Prudential Financial stock currently has a stock price of over $68 but looks slated for an EPS of around $10.09 in FY2021.
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