Allstate: Don't Expect Too Much From This Insurance Giant

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About: The Allstate Corporation (ALL)
by: Kurt Pollet
Summary

Allstate has a history of modest growth and its earnings can be a little volatile.

The insurance giant is exposed to catastrophe losses due to its property portfolio. Allstate has made several acquisitions to diversify its risk profile.

Allstate's stock is reasonably priced and it pays a 2.15% dividend.

Introduction

The Allstate Corporation (NYSE:ALL) is one of the largest insurance providers in the United States. Allstate owns 15 subsidiary companies in the U.S. and also owns a subsidiary in Canada and two subsidiaries in India.

Allstate has a history of modest growth but its earnings are a little volatile. As an insurance company Allstate is exposed to catastrophe losses which can come from weather related events such as hurricanes and wildfires. Allstate has acquired a range of insurance businesses to diversify its risk profile away from its significant property exposure.

The stock is reasonably valued with a forward PE multiple of 9.6x and it pays a dividend that in recent years has increased at the rate of 13% per year. The forward dividend yield is currently at 2.15%.

Allstate is an insurance giant that will likely continue to expand at a modest rate with acquisitions playing a significant role.

Financials

Allstate has reported financial results for the fourth quarter of 2018 (data from Seeking Alpha ).

The company’s reported forth quarter revenue was down 5.8% from the fourth quarter of 2017. Allstate reported diluted earnings per share with a loss $0.91 compared to a profit of $3.36 from the fourth quarter of 2017.

On an annual basis, revenue for 2018 was up 1.1%. Allstate reported a 29% drop in profit with diluted earnings per share of $5.96 compared to $8.36 for the 2017 fiscal year. The 2018 EBIT was down a similar amount over the 2017 fiscal year.

Allstate paid a dividend of $1.84 for the 2018 fiscal year which was up from the dividend of $1.48 paid for the 2017 fiscal year. The current trailing yield is 1.96% and the forward yield is 2.15%. Over the last five years Allstate has increased its dividends every year at an average rate of 13% per year.

The return on equity is currently 10% which is around the average for Allstate. Over the last ten years the company’s return on equity ranged from 5% to 13%.

The profit margin is currently around 6%. Over the last decade Allstate’s profit margin has ranged from 3% to 8%.

The asset ratio (total liabilities to total assets) is 81% which means that Allstate’s total debt is 83% of the value of everything the company owns (note that the asset value is the book value and not the liquidated value of its assets). Since 2009 its asset ratio has dropped slightly from 87% but has been around 81% over the last five years. Higher asset ratios are common with financial companies and a decreasing asset ratio is a trend in the right direction.

The company’s book value is currently $58.38 and with a stock price of $94 Allstate is trading at 1.6x book value.

The analysts’ consensus forecast is for revenue to drop by 10% in 2019 and increase 8% in 2020. Earnings are forecast to jump 52% in 2019 and increasing 8% in 2020. The 2020 PE ratio is 9.6x.

Revenue and Earnings

As an investor, I personally like to examine the company’s revenue and earnings history. To make this task easier and more convenient I like to visually present the data on a chart.

Allstate revenue and earnings history chart

Allstate data by ADVFN

The above chart visually shows Allstate’s revenue and earnings historical trend along with the next two years of consensus forecasts.

Examining the chart shows that Allstate’s revenue has generally increased over the last decade, but the forecast revenue for 2019 shows a drop. The earnings have shown a general upwards trend since 2009 and the forecast earnings show this trend continuing.

Allstate derives most of its revenue from its insurance products. While Allstate also receives some revenue from its wealth products such as estate planning this is only minor source of revenue.

Allstate acquired Esurance in 2011 for $1 billion to compete with Geico for the booming on-line internet insurance market. According to Chicago Business, Esurance has not grown at the same rate as Geico. From 2013 through to 2017, Esurance has grown its number of auto policies by 31% while Geico's grew 41%.

On a profit and loss basis, Esurance has been a little disappointing. Esurance has not made a profit yet since its acquisition. Last year Esurance paid out $1.03 in claims and expenses for every dollar of premium it collected. This is an improvement over recent years but Esurance still has not reached the stage where it can operate profitably. At least Esurance has some pricing power as it has been able to increase premiums while also increasing policy numbers. This is helping Esurance as it has almost reached break-even.

Due to its large property insurance portfolio Allstate is also subject to catastrophe losses. Weather related events such as hurricanes and wildfires can adversely affect its profitability leading to significant volatility in its earnings. There have been reports that Allstate has been raising premiums in high risk areas like Florida to offset the increased risks. This would also limit the number of policies written.

Allstate has been active in acquiring more businesses in an attempt to further diversify its revenue stream and reduce its catastrophe risk profile. Recent acquisitions include SquareTrade, PlumChoice and InfoArmor.

The InfoArmor acquisition was completed in October 2018 for $525 million in cash. InfoArmor is a leading provider of employee identity protection coverage. InfoArmor serves more than 1 million employees and family members at over 1,400 companies.

SquareTrade was acquired in 2017 for $1.4 billion in cash. SquareTrade provides consumer protection plans such as warranties for cell phones and other electronic devices through many of America's major retailers.

Allstate will acquire PlumChoice in a $30 million deal. PlumChoice is a leading provider of cloud and technical support services to consumers and small businesses. Allstate’s interest is this acquisition is due to PlumChoice’s Chromatix technology which Allstate will use as a tech support solution for the millions of customers who have chosen to protect their devices with SquareTrade protection plans.

The company announced in October 2018 that it will buyback $3 billion of shares. This is quite a significant buyback. Considering that Allstate has a current market capitalization of $31 billion the buyback represents around 10% of its market value. The share buyback program will improve Allstate’s earnings per share but its earnings volatility will remain. Allstate has a history of share buybacks having spent $2 billion in 2017 and another $2.5 billion in 2014.

Stock Valuation

Allstate has shown a general upwards trend in its earnings over the last decade which is expected to continue into 2020. The earnings growth from 2014 to 2020 is 7.8% per year. An appropriate method for valuing stocks with increasing earnings is the PEG (PE divided by the earnings growth rate).

With a 7.8% growth rate Allstate’s forward PEG is 1.2 with a 2020 PE multiple of 9.6x.

It’s commonly accepted that a stock is fairly valued when its forward PEG is 1.0 which means that Allstate is almost fairly valued with a stock price of $94. Its fair value would be around $80.

Stock Price

As an active investor I personally like to determine some likely price targets. This gives me a feel for how high the stock price could go in the short term and how soon it could get there.

Allstate ten year stock chart

Allstate chart by StockCharts.com

The stock chart reveals that Allstate’s stock price has trended upwards over the last decade along with the rise in the stock market over the same period. Allstate peaked in early 2018 and pulled back before showing a small rally back up to $101. From there Allstate declined again along with the stock market for the rest of 2018. The stock then rallied this year along with the rally seen from the market indices.

Should the stock keep rallying, in the short term it could trade past the 2018 top. With the stock market rallying, the strong rally seen in 2017 could be replicated again this year. The 2017 rally gained around $35 and if added to the $80 low of the 2019 rally gives a target of around $115.

Over the longer term the stock will likely continue working its way higher along with the stock market. However, if future earnings show poor growth then I would expect the stock’s advance to halt even if the stock market continues higher.

Conclusion

Allstate is a large insurance business with a history of modest growth. Its earnings can be a little volatile as it is exposed to catastrophe losses from weather related events such as hurricanes and wildfires. To manage its risk profile Allstate has acquired a diverse range of insurance businesses which include Esurance and SquareTrade.

The stock is reasonably valued with a forward PE multiple of 9.6x and provides a forward dividend yield of over 2%. Allstate is an insurance giant that will likely continue to expand and become even larger with acquisitions playing a significant role.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.