We are maintaining our 2018 eps estimate of 1043 but

Info icon This preview shows pages 15–16. Sign up to view the full content.

View Full Document Right Arrow Icon
* We are maintaining our 2018 EPS estimate of $10.43, but lowering our 2019 estimate to $10.54 from $10.56. * Given the upward trajectory in the share price, the stock’s favorable valuation relative to peers, and management’s current growth initiatives, we are maintaining our BUY rating. However, we are lowering our target price to $158 from $163, due to a lower peer multiple for insurers since our last note. Our target implies a modest multiple of 15.1- times our 2018 estimate — below the peer median of 16.1. ANALYSIS INVESTMENT THESIS We are maintaining our BUY rating on Travelers Cos. Inc. (NYSE: TRV) but lowering our price target to $158 from $163. Since our upgrade to BUY on April 21, the stock has risen 10%, underperforming the S&P 500’s gain of 11%. We expect margins to increase as the company raises prices on auto insurance and expands its data analytics and digital initiatives. We also believe that Travelers can generate a higher return on capital, and note that it recently raised the dividend by 7% and announced an additional $5 billion share repurchase program. The stock has declined 12% from a 52-week high of $151, and we feel the price offers investors a favorable entry point and appears undervalued relative to peers. Our target price of $158 implies a modest multiple of 15.1-times our 2018 EPS estimate — below the peer median of 16.1. RECENT DEVELOPMENTS TRV shares have declined 11% over the past quarter, underperforming the S&P 500’s decline of 7%. They have also underperformed over the past year, with a gain of 10%, compared to an 11% increase for the index. The beta on TRV is 0.87, in line with peers. On April 24, Travelers reported 1Q18 core income of $2.46 per share, up 14% from 1Q17. The increase reflected higher net favorable prior-year reserve development as well as underlying underwriting gains and lower taxes. EPS missed our estimate of $2.67 and the consensus forecast of $2.67, as catastrophe losses of $354 million were higher than expected. Core income rose 10% to $678 million. On a GAAP basis, EPS rose 12% to $2.42 and net income rose 8% to $669 million. Revenue rose 5% to $7.3 billion, which met both our estimate and that of the consensus. Adjusted book value at the end of the quarter was $84.54 per share, up from $81.56 at the end of 1Q17. Core ROE for the period was 11.9%, up from 10.8% a year earlier. TRV’s favorable prior-year reserve development totaled $150 million in 1Q, up from $81 million a year earlier. The shares fell 3% following the earnings report, likely due to the EPS miss and a general market decline. On the 1Q call, CEO Alan Schnitzer noted strong results in the Business Insurance and Bond & Specialty Insurance segments and highlighted continuity in the 86% overall retention rate as well as growth in new business. Results in Personal lines were positive, Mr. Schnitzer was encouraged by the better results in auto insurance despite storm damage, and noted that the company was raising prices and improving underwriting to improve profitability. We note, that management has attributed a general increase in the incidence and severity of bodily injuries to cell phone usage and higher driving speeds. The company
Image of page 15

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 16
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern