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Trefis Has A Price Estimate Of $142 For Travelers' Stock
Trefis price estimate for Travelers
Travelers’ net revenues grew roughly 4% y-o-y to $8 billion in Q3, which was lower than the consensus estimates. This year has been challenging in terms of macroeconomic scenarios due to events like the ongoing U.S.-China trade war, the yield curve inversion, and Fed rate cuts. While the company’s revenues are largely driven by insurance premiums, income generated by investing its insurance premiums is very important for the company’s profitability. Due to the adverse economic conditions, this investment income is expected to remain under pressure for the full year 2019. Moving forward, we expect the insurance giant to maintain its growth rate of around 5-6% in 2019, on the back of growth in insurance premiums across segments.
Takeaway & Earnings Summary:
Travelers’ stock has witnessed significant fluctuations in its value since the beginning of 2019, with its price soaring to $155 in July which was 34% more than its value in January. Overall, the stock has rallied 19% with its share price increasing from over $115 in January to around $136 now.Although the company’s stock price has fluctuated in 2019 driven by a mixed bag of quarterly performance, we believe that the company’s stock is still overvalued and estimate Travelers’ valuation to be $142 per share - roughly 5% more than the current market price.
Q3 2019 Earnings Summary:
In Q3 2019, Travelers' reported Total Revenues of $8 billion, up by 4% y-o-y. This increase could be attributed to a 5% y-o-y jump in Personal Insurance segment followed by a 3% increase in Business Insurance revenues, partially offset by a 4% drop in revenue from investment of insurance premiums.Further, total expenses increased by 10% y-o-y due to a spike in claims & expenses by a figure of $575 million. This led to a 44% downfall in the company's adjusted net income, from $709 million in Q3 2018 to $396 million in Q3 2019.Similarly, its adjusted net income margin reduced by 424 bps on a year-on-year basis from 9.2% in Q3 2018 to 4.9% in Q3 2019.Moreover, Travelers’ is expected to maintain its growth rate of around 5-6% in 2019, on the back of growth in insurance premiums across segments. However, revenues from the investment of Insurance Premiums are expected to struggle in the near term due to challenging macroeconomic conditions.For the fourth quarter of FY 2019, the consensus estimate for earnings per share is in the range of $2.62 to $3.96 while net revenues are expected to be around $10.75 billion.
#1. Estimating Travelers' Total Revenues:
Total Revenues have increased from $26.8 billion in 2015 to $30.3 billion in 2018, and could grow 5% to $31.7 Billion in 2019
Our Interactive Dashboard Analysis, How Does Travelers Make Money?, Provides An In Depth View Of The Company's Revenues.
Revenues for Travelers [=A+B+C+D]
Personal Insurance [A]
Bond & Specialty Insurance [B]
Business Insurance [C]
Investment of Insurance Premiums [D]
#2. Deriving Travelers' Adjusted Net Income Figure:
Travelers is expected to have a Net Income of $2.6 billion in 2019 which is 2% more than the previous year figure. This increase is mainly due to higher revenues, partially offset by higher effective Tax Rate as compared to 2018.
Net Income Margin would see a slight decrease from 8.3% in 2018 to 8.1% in 2019, mainly driven by 5% increase in total expenses due to increase in claims and claims adjustment cost.
Net income (loss) applicable to common shareholders [=A*B]
Revenues for Travelers [A]
Adj. Net Income Margin
Notably, Adjusted Net Income decreased from $3.4 billion in 2015 to $2.1 Billion in 2017, before improving to $2.5 billion in 2018.
#3. Deriving Travelers' EPS Figure:
The EPS figure has fluctuated over the last 4 years. It decreased from $10.96 in 2015 to $7.38 in 2017, before improving to $9.35 in 2018. We expect this upward movement to continue in 2019 and enable Travelers to report an EPS of $9.93.
EPS growth from 2018 can be attributed to higher Adjusted Net Income and lower Shares Outstanding.
GAAP Diluted EPS [=A/B]
Net income (loss) applicable to common shareholders [A]
Average diluted common shares issued and outstanding [B]
Travelers has regularly invested in share repurchases to boost shareholder returns. Its share repurchase is likely to touch $1.6 billion for the full year 2019.
#4. Estimating Travelers' Share Price:
Our Price Estimate of $142 For Travelers' Stock is based on our Detailed Valuation Model, and implies a 14.3x P/E Multiple on expected 2019 EPS of $9.93
Share Price [=A*B]
DISAGREE WITH OUR FORECASTS? CREATE YOUR OWN
1. How to save your forecasts for Travelers:
Click on the blue "Try Trefis" button in the header to create an account, then navigate back to this dashboard. Now, any changes you make to these inputs will be auto-saved as a scenario (see left panel of dashboard).
2. How to monitor your scenario vs. actual results
Once you've saved your forecast, you can "rename" your scenario by clicking on the gear icon next to the scenario (on the left panel). For more info, see this quick, 30-sec video (look at the 9 sec mark)
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