MetLife Is (Still) Well-Positioned For 2020 And Beyond

Summary

• MetLife's stock has significantly underperformed the broader market so far in 2020. However, the company's most recent operating results were well-received by the market.
• The takeaway: this insurer is well-positioned for 2020 and beyond, but shareholders may be in for a bumpy ride over the next few quarters.
• We are long MetLife, and we plan to stay long the stock.

MetLife's (NYSE:MET) stock price has recovered lately but it is still significantly underperforming the broader market on a YTD basis.

Data by YCharts

As I recently described here, the pullback in MET shares should be viewed as a great long-term investment opportunity because this global insurer is well-positioned for the years ahead. And it helps that MetLife's Q1 2020 results show that the company's investment thesis remains intact.

The Latest, MetLife Is (Still) Well-Positioned for 2020

On May 6, 2020, MetLife report Q1 2020 results that beat the consensus bottom-line estimate but that missed on the top-line. The company reported adjusted EPS of $1.58 (beat by $0.14) on revenue of $15.5B (missed by $840mm), which from an earnings perspective actually compares favorably to the year-ago quarter.

Source: Q1 2020 Earnings Slides

The highlights:

• Adjusted revenue grew by slightly under 1% YoY (which is saying something in this environment, in my opinion)
• Adjusted EPS growth of 5% YoY, with U.S. adjusted earnings coming in 8% higher than the same period of the prior year.
• Adjusted book value growth of 15% YoY (to $52.36)
• Repurchased $500mm worth of shares during the quarter and raised the dividend by 4.5%. Note: management subsequently disclosed that they were going to "pause" buybacks due to the uncertainty.

The company reported strong operating results but, as expected, investors were most concerned about how Metlife was positioned to deal with the COVID-19 related headwinds, and rightfully so. But, management was prepared for the discussion and they did a great job in highlighting the steps that have already been taken to deal with the economic uncertainty that has been caused by the spread of the virus.

Source: Q1 2020 Earnings Slides

The company also already tapped the bond market to further strengthen its capital position and management continued to highlight the short- and long-term expense management goals. The takeaway, MetLife has a strong capital position and a sufficient liquidity buffer.

Make no mistake about it, it will not be an easy ride for MetLife as the pandemic continues to negatively impact the global economy but I do believe that the company is properly positioned to weather the storm, i.e., operationally and financially. During the conference call, management spent a considerable amount of time talking through how the company's operations were impacted by the pandemic. At the end of the day, management believes that the company's employee base responded well to the crisis. The company actually benefited from having operations in Asia as they got an early look at what a recovery may look. Operationally, MetLife is/was prepared for the disruptions.

It is a similar story from a financial standpoint. As I mentioned in my last article (linked above), MetLife's management team started getting defensive in 2018/2019 and began to proactively position the portfolio for a potential downturn. As such, the company entered 2020 in a position of strength.

Source: Q1 2020 Earnings Slides

MetLife's large investment portfolio is obviously still exposed to the market turmoil but, in my opinion, the defensive positioning will pay dividends over the next few quarters. And looking forward, there is no denying that it is going to be a challenging environment for Metlife. However, it is encouraging that management is not only acknowledging this point as the current reality but they are actually embracing it as an opportunity to better position the company for the future.

What's Next?

Management provided the following outlook slides for Q2 2020.

Source: Q1 2020 Earnings Slides

Reserve builds are already coming into play but, as expected, investors should begin to bake in expectations of a bumpy ride through the remainder of 2020 (if not longer). On the other hand, investors should not underestimate just how impactful expense management could be for this insurer. For example, management is full steam ahead with their expense reduction plans and Q1 2020 was another step in the right direction.

Source: Q1 2020 Earnings Slides

Cutting out expenses alone will create a tremendous amount of earnings power over the next few years. And yes, reducing structural costs are not the long-term answer but it will definitely help MetLife maintain during this challenging environment.

Valuation

MetLife's stock is still trading at attractive valuations based on its own historical metrics, even after the recent run up.

Data by YCharts

Additionally, MET shares are trading well-below Morningstar's fair value estimate.

Source: Morningstar

MetLife's stock has been under pressure for the last few quarters, which makes sense given the challenging operating environment, but I believe that the risk is currently to the upside if you are willing (and able) to hold MET shares for the long haul.

Risks

The biggest risk for any insurer, including MetLife, is the sufficiency of the company's reserves. The company will likely have immaterial one-off reserve charges on a somewhat consistent basis, but any material adjustment could negatively impact the stock price.

Additionally, the long-term care business could turn out to be a significant headwind, in my opinion, so investors should pay close attention to these reserves through at least 2020. As bad as it sounds, COVID-19 may actually improve the prospects for this block of business with how things are playing out for the older population.

And lastly, the Federal Reserve and rates are a concern right now, but investors need to also consider the macro environment. A deteriorating economy would eventually negatively impact the financial sector. The COVID-19-related impacts should be closely monitored in the months ahead. If the economy is "shut down" for longer than anticipated, MetLife's stock will likely continue its downward trend.

Bottom Line

2020 has not been a great year for MetLife's stock but, in my opinion, this global insurer is well-positioned for 2020 and beyond. The COVID-19 related concerns are real but I believe that this company entered 2020 in a position of strength, which should help the stock performance over the next 18-24 months.

The Q1 2020 results were nothing to write home about but I believe that the earnings release (and management's commentary) set the tone for this company. Simply put, 2020 will be a challenging environment but MetLife's management team has the company properly positioned from both an operational and financial standpoint. The stock may remain under pressure over the next few quarters due to the headwinds but, in my opinion, investors with a long-term perspective should consider adding MET shares on any significant pullbacks.

Disclosure: I am/we are long MET. 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.