Using the GuruFocus All-In-One Guru Screener, I searched for companies that were buying back shares and were trading at or below book value. I excluded OTC and micro-cap stocks.
Buying back shares is a great way for companies to return capital to shareholders. If the company can maintain its net income, the earnings per share will increase due to fewer shares being available. Not all share buybacks are good for the shareholder. The company should be buying back shares when the stock is undervalued, otherwise, capital would be better utilized by sending it back to the shareholder in the form of a dividend.
That is why I chose to search for stocks that are trading below book value. The book value of the company is essentially what is left if all of the liabilities are paid off. Usually a stock is cheap if it is trading at a price below book value. The way it would not be cheap is if the assets are mispriced on the balance sheet or if the company is losing large amounts of cash.
The resulting stocks from the screen are: Platinum Underwriters (PTP), Assurant (AIZ), Axis Capital (AXS) and Montpelier Re (MRH). All four of the companies are in the insurance industry with three of them involved in reinsurance. Insurance companies have two streams of revenue: insurance premiums and investment income. Most insurers typically concentrate their investment portfolios in long-only, investment grade, shorter-term and fixed-income securities. The effective federal funds rate has been at a historically low level near zero since December 2008, effectively shrinking the second stream of income for insurance companies. Here is a closer look at the companies:
Platinum Underwriters Holdings Ltd. (PTP)
Market Cap: 1.82 billion, P/E: 8.90
Business Predictability: 1/5, Financial Strength: 7/10, Profitability & Growth: 4/10
Platinum Underwriters is headquartered in Bermuda and provides property and marine, casualty, and finite risk reinsurance coverage products worldwide. A.M. recently affirmed their financial strength rating of A (Excellent). The stock is currently trading at a price-to-book ratio of 0.98 and shares outstanding have been decreasing at an annual rate of 12.82 percent for the past five years. Looking at the chart above, the share buybacks started when the price-to-book ratio dropped below one. The company has a history of underwriting profits and their operating margin for 2013 was 39.64 percent. The down year in 2011 was due to their catastrophic exposure with the Japanese tsunami, earthquakes in New Zealand, and tornados and Hurricane Irene in the United States.
| Platinum Underwriters (PTP, Financial) | |||||
| Ă‚ | 2009 | 2010 | 2011 | 2012 | 2013 |
| Premiums Earned ($Millions) | 937.3 | 780 | 689.5 | 566.5 | 553.4 |
| Net Investment Income ($Millions) | 163.9 | 134.4 | 125.9 | 99.9 | 72 |
| Operating Margin (%) | 33.26 | 26.25 | -28.49 | 46.84 | 39.64 |
| Earnings Per Share ($) | 7.33 | 4.78 | -6.04 | 9.6 | 7.35 |
Assurant Inc. (AIZ)
Market Cap: 4.96 billion, P/E: 10.20
Business Predictability: 3.5/5, Financial Strength: 6/10, Profitability & Growth: 8/10
Assurant is headquartered in New York City and provides specialized insurance products and related services in North America, Latin America, Europe and internationally. The company operates through four segments: Assurant Solutions, Assurant Specialty Property, Assurant Health and Assurant Employee Benefits. The different businesses of Assurant have A.M. Best ratings of either “A (Excellent)” or “A- (Excellent).” The stock is currently trading at a price-to-book ratio of 0.98 and shares outstanding have been decreasing at an annual rate of 10.53 percent for the past five years. The share buybacks have accelerated since 2010 while the stock was trading below book value. Their stock has performed the best out of the group for the past five year by increasing 175 percent.
| Assurant (AIZ, Financial) | |||||
| Ă‚ | 2009 | 2010 | 2011 | 2012 | 2013 |
| Premiums Earned ($Millions) | 7,550 | 7,403 | 7,125 | 7,237 | 7,760 |
| Net Investment Income ($Millions) | 699 | 703 | 690 | 713 | 667 |
| Operating Margin (%) | 8.16 | 7.11 | 8.64 | 8.91 | 8.73 |
| Earnings Per Share ($) | 3.63 | 2.5 | 5.51 | 5.67 | 6.3 |
Axis Capital Holdings Ltd. (AXS)
Market Cap: 5.03 billion, P/E: 10.20
Business Predictability: 2.5/5, Financial Strength: 8/10, Profitability & Growth: 8/10
Axis is a global insurer and reinsurer, providing clients and distribution partners with a broad range of specialized risk transfer products and services. The company is headquartered in Bermuda. It has an A.M. Best rating of “A+ (Superior).” The stock is trading at a price-to-book ratio of 0.95 and shares outstanding have been decreasing at an annual rate of 6.08 percent for the past five years. This company also started buying back shares when the stock started trading for less than book value. The company was strong enough to maintain positive earnings during 2011 when most reinsurance business had losses.
| Axis Capital (AXS, Financial) | |||||
| Ă‚ | 2009 | 2010 | 2011 | 2012 | 2013 |
| Premiums Earned ($Millions) | 2,792 | 2,947 | 3,315 | 3,415 | 3,707 |
| Net Investment Income ($Millions) | 464 | 407 | 362 | 381 | 409 |
| Operating Margin (%) | 19.18 | 25.21 | 1.62 | 14.02 | 17.5 |
| Earnings Per Share ($) | 3.07 | 6.02 | 0.07 | 4 | 5.93 |
Montpelier RE Holdings (MRH)
Market Cap: 1.48 billion, P/E: 8.20
Business Predictability: 1/5, Financial Strength: 7/10, Profitability & Growth: 7/10
Montpelier Re is headquartered in Bermuda and is a global insurance and reinsurance company. It operates in three segments: Montpelier Re, Montpelier at Lloyd’s and Blue Capital. A.M. Best rated the company an “A (Excellent).” The stock is now trading at its book value and shares have been decreasing at an annual rate of 11.27 percent over the past five years. Looking at the chart above, the stock buybacks started after the company started trading below its book value. With a P/E ratio 8.20, the stock is a buy if it can maintain its earnings.
| Montpelier Re (MRH, Financial) | |||||
| Ă‚ | 2009 | 2010 | 2011 | 2012 | 2013 |
| Premiums Earned ($Millions) | 573.2 | 625.4 | 622.7 | 616.5 | 599.6 |
| Net Investment Income ($Millions) | 81 | 74 | 68.7 | 67.1 | 64 |
| Operating Margin (%) | 54.84 | 28.15 | -16.06 | 30.1 | 36.7 |
| Earnings Per Share ($) | 5.36 | 2.97 | -2.01 | 3.67 | 3.61 |
Outlook
All four the companies have been demonstrating a shareholder friendly capital allocation model by buying back shares while their stocks have been trading below book value. The companies have been able to weather through the low interest rate storm and will be able to start taking advantage of rising interest rates. The Federal Reserve is expected to start raising interest rates by the end of next year, with an estimated rate of 2.25 percent by the end of 2016. I think that Axis Capital is the stock to buy out of the four. Axis was the only company to have increases for the past three years in premiums earned, net investment income, operating margin, and earnings per share. The company also has the highest scores for financial strength and profitability and growth. According to the GuruFocus Reverse DCF Calculator the stock is trading with an implied growth rate of 0.08%. Analysts are expecting a five-year annual growth rate of 5.24 percent. Even at that rate the stock has a fair valued of $64.43 making it undervalued with a 27 percent margin of safety. It has lagged the other companies over the past three years, and not it is time for Axis to catch up.
