Cincinnati Financial: Lack Of Non-GAAP Earnings Growth Offset By Investment Income

Summary

• I often use the term "leaky equity bucket" to describe a situation where net income flows into equity, but significant amounts flowing out of equity do not benefit shareholders.
• With Cincinnati Financial, this is not the case. Furthermore, significant amounts of investment income are flowing into equity, in addition to reported net income.
• The P/E ratio seems overly high, but not so much when investment income is taken into account.

Investment Thesis

Cincinnati Financial (NASDAQ:CINF) grew EPS by an average 10.10% for the three years ended December 2019. Based on analysts' consensus estimates, EPS is projected to grow by negative 1.44%% average per year from 2019 to 2022. Despite this, taking into account analysts' low and high estimates, and dividend yield, returns of ~8% to 16% average per year are indicated for buying at current share price levels and holding through to end of 2022. Those return levels rely on P/E multiples around historical levels in the mid 20s. The projected negative EPS growth from 2019 to 2022 could cause multiples to contract, reducing returns below the ~8% to 16% indicated above. At the same time, investment income, which exceeds non-GAAP earnings over the last 3.75 years, is not reflected in the P/E multiple, which makes the actual P/E multiple not as high as it might appear. Cincinnati Financial is due to report Q4 and FY 2020 earnings, post market close on Feb. 10. Reported investment earnings, realized and unrealized, could be a counter to any non-GAAP earnings weakness.

Looking for share market mispricing of stocks

What I'm primarily looking for here are instances of share market mispricing of stocks due to distortions to many of the usual statistics used for screening stocks for buy/hold/sell decisions. The usual metrics do not work when the "E" in P/E is distorted by the impact of COVID-19. And if the P/E ratio is suspect, so too, then, is the PEG ratio similarly affected. I believe the answer is to start with data at the end of 2019, early 2020, pre-COVID-19 and compare to projections out to the end of 2022 or later, when hopefully the impacts of COVID-19 will have largely dissipated. Summarized in Tables 1, 2, and 3 below are the results of compiling and analyzing the data on this basis.

Analyst’s 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.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.