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Travelers: Upgraded, Target 30% Higher

September 20, 2011 | About:
The Science of Hitting

The Science of Hitting

The Travelers Companies (TRV), a provider of a wide range of commercial and personal P&C insurance products, has lagged the market over the past six months, falling more than 13% compared to mid-single digit declines in the S&P 500 and DJIA. As of June 30, 2011, the company had more than $25 billion in equity, equal to a book value just shy of $60 per share; the stock, by comparison, has been fighting the $50 hurdle for the past month, and trades nearly 20% below book value.

On Tuesday, the stock moved around 3% higher (before giving gains back late in the day) on an upgrade by Goldman Sachs (GS) analyst Michael Nannizzi from sell to buy ($63 target). He noted, among other things, the company’s 3.3% dividend yield, which is roughly 140 basis points above the yield on 10-year Treasuries.

In the second quarter, the company reported that total after-tax catastrophe costs nearly $1.1 billion, due to the tornadoes and hail storms in the United States during April and May. While the disasters caused a short term stoppage in huge share buybacks, management made their long term intentions extremely clear: “On the premise that weather patterns return to more normal levels and our profitability returns to historical levels, and to the extent that the capital can be put back to work in our business for growth opportunities, we will continue buying back shares.”

Even with the temporary reduction in buybacks, management can still tout impressive numbers: Year-to-date repurchases total $1.3 billion of common stock, with a total trailing twelve month repurchase of $3.5 billion. Those two numbers have reduced diluted shares outstanding by 3.5% and 11.9%, respectively. Since the end of 2007, the number of shares outstanding has decreased by more than one-third.

For now, the company needs to pay claims, and buybacks are on hold. However, the important realization for long term shareholders is that the resulting 25% price decline from the low $60s in May is really just an opportunity. For one, it’s a chance to buy more shares in a company that has increased BVPS at a rate of 10.5% and 9.3% in the last five and ten years, respectively, for 20% below book. Secondly, management will be able to continue repurchasing shares (pending any increase) at bargain-bin prices, which will further compound strong business results in expansion of book value per share.

In the end, the short-term decline only sweetens the opportunity for long-term gain. For investors who can see past next quarter, shares of TRV may be worth a second look.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves (potentially over a period of years). As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.8/5 (13 votes)


Slam21 - 3 years ago
I like your take on this but make sure to mention the risks as well. Be aware that a significant portion of the earnings power of the recent years at TRV has come from prior year reserve releases rather than current year underwriting profits, so the pressure is on the P&C industry to get some pricing improvements coming through in the next 1-2 years. Otherwise, a "replacement earnings" issue for future profitability will become something to contend with.

As well, as long as interest rates are low, then future investment income results face a headwind.

At 20% below BV, the "risks or threats" noted in this comment are probably being considered by the market, but nonetheless its good to be aware.
The Science of Hitting
The Science of Hitting premium member - 3 years ago
Good points Slam21, I probably should have touched on the actual business operations and earnings of the past couple of years at TRV. I'll make sure to dig deeper into these areas when I write an article about the company's recent presentation at the Barclay's Capital Global Financial Services Conference.

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