A) Introduction
Voya Financial Inc (NYSE:VOYA) is a diversified financial company offering life insurance, financial planning, and investment management for 13 million customers with assets totaling $486 billion. We believe the company offers a rare opportunity in which the stock combines an attractive valuation with excellent earnings growth and strong price momentum. Each of these factors is a good determinant of future success, and we will outline why as we progress through the analysis.
The report will start with a breakdown of Voya's valuation profile, then will proceed to an analysis of the price and profit growth, followed by an analysis of recent "smart money" transactions, and concluding with some qualitative analysis and conclusions. Perhaps due to its recent entrance into the public markets, the company remains far too cheap for its current trajectory. Voya is poised for significantly more upside over the next 12 months.
B) Value
We take a quantitative approach to investing, preferring to focus our analysis on a certain set of metrics that have a strong predictive ability. We'll start by analyzing Voya's value profile. This is important to look at as "Value stocks (with low ratios of price to book value) have higher average returns than growth stocks (high price-to-book ratios)". Voya's valuation profile is shown below:
(click to enlarge)
Data Source: QuantifiedAlpha.com
Voya is a very cheap stock. Twelve-month sales are larger than the current market cap, as evidenced by its 103% sales yield. The company is extremely cheap from an earnings basis as well with its 23% earnings yield more than five times the market median. The stock trades at an outrageously low price to book multiple of 0.58, which is in the 95th percentile of all stocks in the market (100 being lowest P/B). Voya is also a free cash flow machine, which is reflected by the companies 37% FCF yield.
Our algorithms project Voya's cheap valuation to contribute 7.07% of alpha moving forward, based on how companies with similarly cheap valuations have historically outperformed. This puts it in the 96th percentile of all stocks based on value.
C) Momentum, Growth, and Profitability
There are a variety of different growth metrics that have been shown to predict stock returns. Most important among them is price momentum. Winning stocks keep winning, and losing stocks tend to keep losing. Voya's growth profile is shown below:
(click to enlarge)
Data Source: QuantifiedAlpha.com
Voya has recently been gathering momentum. Its stock price has gained 27% over the last twelve months, and 20.4% over the last six. The company is also seeing huge bottom-line growth. Earnings have grown 92.4% over the last four quarters, relative to the same period a year ago. Management has also kept Voya efficient, shown by its 14% return on equity.
Our algorithms project Voya's solid momentum and profitability profile to contribute 3.04% of alpha moving forward, based on how companies with similarly strong growth have historically outperformed. This puts it in the 82nd percentile of all stocks based on growth.
D) "Smart Money" Sentiment
In addition to value and momentum, we will also analyze how the "smart money" on the street is playing Voya. "Smart money" stakeholders are short sellers, company insiders, and institutions. Each of these stakeholders tends to be much more sophisticated than the average investor. We have found loads of academic research showing that short sellers, company insiders, and institutions all predict stock returns. This breakdown is shown below:
(click to enlarge)
Data Source: QuantifiedAlpha.com
While the market has ignored Voya, it's clear that the 'smart money' hasn't. Institutional investors have recently increased their positions in the stock, shown by the 2.3% increase in institutional ownership over the last three months. Company insiders have been selling, though this reflects a market-wide trend. Short interest remains an extremely low at 1.15% of the total float, reflecting little conviction that the stock is headed lower.
Overall, our algorithms project Voya's sentiment profile to contribute 5.84% of alpha moving forward, based on how companies with similar levels of sentiment have historically outperformed. This puts it in the 96th percentile of all stocks based on sentiment.
E) Earnings Momentum
Next, we'll see how Voya has been performing relative to analyst expectations recently. This is key to watch, as stocks that beat analyst estimates often see big jumps in price. This is doubly important for Voya, as they release earnings this week. Thus, it is crucial for investors to anticipate whether earnings will beat expectations ahead of time. Our earnings model allows us to do this, with a high level of accuracy.
Voya's earnings history is shown below, with the grey line representing how much Voya's reported EPS figure deviated from estimates:
(click to enlarge)
Data Source: QuantifiedAlpha.com
Voya has only missed EPS estimates once since its IPO. It consistently beats expectations by a wide margin, with last quarter's reported EPS being 10% higher than analyst estimates. This is a very good sign for the upcoming earnings release, as it means that analysts have a history of conservatively forecasting Voya's EPS. This brings us to our projections for this quarter:
(click to enlarge)
Data Source: QuantifiedAlpha.com
Our algorithms project a 65-75% probability that Voya will beat analyst EPS estimates this quarter, with the expected beat size to be small (0-5% ahead of estimates). The project a slightly lower likelihood of an upside surprise on revenue estimates (55-65% chance), though with a likely larger surprise if they do beat (5-10% ahead of estimates).
Voya releases earnings on Tuesday, before the market open. Wall street analysts are currently forecasting EPS of $0.84, and revenue of $335.22 million. Expect the actual EPS to come in at $0.86 (range of $0.84 to 0.88), and for revenue to be $360 million (range of $353 to $369 million). Overall, we rate Voya's earnings momentum strength to be a solid 3.5 stars out of five.
F) Qualitative Analysis
Looking beyond the numbers, we see two big catalysts that will directly impact earnings over the next twelve months and help propel the stock price upwards.
Voya is an extremely shareholder friendly company and has consistently bought back shares of the company. Management understands that the company is currently undervalued, and is taking advantage of the situation by buying back huge amounts of shares. Buybacks have twin benefits. First, they provide a steady source of buying power and protect the stock price from any sharp falls (as management would likely use price declines to buyback stock). Second, they increase future earnings per share by reducing the float. Academic studies have shown that companies that buy back their own shares tend to outperform the market.
The second main catalyst is Voya's continued ROE and ROC expansion, shown in the chart below:
Voya has managed to increase its return on equity and return on capital every year since fiscal 2012. The company is targeting a 13-14% ROE for 2018, and 11-12% ROC by 2018. Given the company's current growth trajectory, this looks conservative and highly achievable.
G) Conclusions
This brings us to our projected 12-month price targets. Our equity pricing model use historical back testing to predict the amount of "excess returns" (i.e alpha) a stock will generate. It combines this with the stock's beta to project a base case target price, as well as a range of potential prices. This range is expected to have a 75% area of accuracy (i.e. the stock price has a 75% probability of being within the range in 12 months). These projections are shown below:
Data Source: QuantifiedAlpha.com
In our base case, the Quantified Alpha algorithms expect Voya to rise from its current price of $46.95 to $59.04 over the next twelve months (representing a gain of +25.7%). We project a 75% probability that Voya's stock price will be between $49.41 to $67.72 in 12 months. We're far more optimistic than Wall Street analysts, who currently have an average 12-month price target of $50.04 (representing upside of 6.6% from current prices).
There is very little liquidity in Voya's long-term options so investors who want to take advantage of this opportunity must do so through common equity. Given the volatile nature of earnings, it may be a good idea to sit tight until after earnings are released on Tuesday.
Voya has all the ingredients of success and we feel the stock is great investment opportunity in an otherwise expensive market. BUY VOYA
