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Summary

  • The stock price was unduly punished for a Q4, 2013 earnings miss that was uncharacteristic and grounded in one-time events.
  • The company has presented a compelling plan for organic growth over the next 5 years that is not based on cannibalizing business from competitors.
  • The company is re-purchasing $40 million of its own stock, and is considering a dividend increase.

HCI Group, (NYSE:HCI) is a small-cap, Tampa, Florida-based insurance holding company that provides homeowners', condominium owners', renters', and most recently, flood insurance. It also has an information technology division called "Exzeo" that markets proprietary personnel and production management software to other insurance companies, and of late, has formed a commercial real estate investment venture. I first wrote about HCI in April 2013 (here), when it was trading around $25. Since that article, the stock has traded up to $53, and after an uncharacteristic Q4, 2013 earnings miss, very swiftly back down to $34. At the writing of this article, HCI was trading around $39, up nicely the day after announcing Q1, 2014 earnings that easily beat analyst estimates. Notwithstanding a recent SA article by another contributor predicting the total demise of HCI (read the conference call transcripts to the contrary) at current price levels, I believe HCI is once again an undervalued stock that was unduly punished for its only earnings miss in a long line of positive earnings surprises, and that it will bounce back to the low $50s when the market recognizes its true value. Here is why:

Housing Recovery in Florida and Expansion Plans

The Florida housing market is still in the midst of a strong recovery from the "great recession", and is seeing 20% sales increases year-over-year. Foreign buyers are making all-cash purchases of anything they can get their hands on. Land and home prices have been rising 1% per month in large suburban areas, and the current demand for new homes is so strong that many builders have instituted lottery systems to determine who gets to buy a new home. All of this is very good news for the property and casualty insurance business, which is the bread and butter of HCI's operations. During the most recent conference call, HCI's CEO announced the expansion into the federally mandated flood insurance market and that this business segment was showing rapid growth. He was also quick to indicate that the company had very little exposure to the recent floods in the Florida panhandle and that those floods would have no material impact on the company. He further mentioned that the company has significantly strengthened its re-insurance position and that there is a desire to expand outside of Florida over the coming years.

Valuation Metrics

HCI's 5-year growth rate is projected to be 39% annually vs. 10% industry and sector expectations. Its P/CF ratio is 6.6 vs. the industry average of 10.3. Generally, a P/CF ratio below 10 indicates that a company is undervalued. HCI's PEG ratio is a low 0.34, compared to the 1.91 industry average. The lower the PEG ratio, the more undervalued the stock relative to its peers.

At the writing of this article, HCI was trading at 8.7x projected 2014 earnings of $4.38 per share and just 7.3x 2015 projected earnings of $5.20. This compares to industry averages of 11.4 and 10.3 for the same periods. Just before the Q4, 2013 earnings miss, HCI was trading at 9.5x TTM earnings, so there is room for multiple expansion.

Other Factors and Conclusion

Indications are that HCI is presently undervalued and the real estate market recovery and business expansion plans should be catalysts for strong growth over the next 2-3 years. HCI is optimistic about its new commercial real estate venture and proprietary software, which by all accounts is being well received in the property and casualty insurance sector. The $0.275 quarterly dividend yields 2.9% and offers some incentive to wait for stock appreciation. HCI also announced that it has set aside $40 million to re-purchase its own common stock over the coming months, and has already re-purchased about $7 million in the $37 price range. These two factors should provide solid price support at current levels. Analyst sentiment is bullish, with no sell and mostly buy recommendations, and there have been recent insider stock purchases with no selling. All that said, and despite the doom and gloom predictions elsewhere on this site, it is not unreasonable to expect HCI to once again trade at 9.5x next year's projected earnings, producing a target price of $50. As with any stock, there is the risk of capital loss, so conduct your own research and speak with your investment advisor about HCI.

Disclosure: I am long HCI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I did purchase before the 1st-quarter earnings report.

Source: HCI Group: Do Not Believe The Tale Of Woe