Crawford & Company: An Undervalued and Underfollowed Small-Cap

The company is a leader in insurance claims management

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Mar 24, 2022
Summary
  • Crawford provides claims management and outsourcing solutions to the insurance industry.
  • The company is facing margin headwinds in international markets.
  • Crawford trades at a single-digit price-earnings ratio and pays an above-market dividend yield
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Crawford & Company (CRD.A, Financial)(CRD.B, Financial) is the largest publicly traded independent provider of claims management and outsourcing solutions with nearly 9,000 employees in over 70 countries around the world. Jim Crawford founded the company in 1941.

What started as an idea in Columbus, Georgia to make milk truck deliveries more efficient has evolved into a global enterprise, going beyond just claims to solve complex, strategic challenges for businesses around the world. Today, the company handles claims in more than 150 countries and has globally recognized brand names like Crawford, Broadspire and Contractor Connection. Clients include multinational carriers, brokers and local insurance firms.

Business summary

The company delivers services to its clients through a global service line reporting structure consisting of the following three operating segments:

Crawford Loss Adjusting, which services the global property and casualty market, provides claims management services globally to insurance carriers and self-insured entities related to property and casualty losses. The Crawford Loss Adjusting segment accounted for 43.2% of the company's revenues before reimbursements in 2021. These losses are typically related to physical damage to commercial and residential real property, certain types of personal property and marine losses.

Crawford TPA Solutions, which trades under the Broadspire brand in North America, provides third party administration for workers' compensation, auto and liability, disability absence management and medical management, as well as accident and health insurance to corporations, brokers and insurers around the world. Through this segment, the company also provides a complete range of claims and risk management services to corporations in the self-insured or commercially-insured marketplace inclusive of brokers and insurance companies. This segment accounted for 36.1% of the company's revenues before reimbursements in 2021.

Crawford Platform Solutions provides services to the global property and casualty insurance markets through service lines known as Contractor Connection and Network Services. Contractor Connection provides a managed repair service using the largest independently managed contractor network in the industry with approximately 6,000 credentialed residential and commercial contractors. This segment accounted for 20.7% of the company's revenues.

These segments will be redefined in 2022 according to the company, though they have not yet revealed how.

Financial review

The company reported full-year 2021 results on March 14. On a constant currency basis, revenues before reimbursements were $1.07 billion, which was an increase of 9% over the prior year. The Loss Adjusting segment increased revenues 8.5%, Platform Solutions increased 32.4% and TPA Solutions increased 7.2%.

The company faced margin headwinds during the year, primarily in international markets. This was caused by a diffcult claims environment and fewer wage subsidies in Canada, delayed travel and hospitality pandemic recovery travel in Europe, increased competition for talent in Asia and pressure in one of their U.K. businesses. As a result, adjusted net income declined 14% to $39.0 million in 2021, compared to $45.4 million in 2020

The company maintains a reasonably safe balance sheet with cash and equivalents of $53.2 million and total debt and capital lease obligations of $288 million. The company typically generates strong free cash flow which has totaled $23 million, $56 million and $54 million over the past three fiscal years sequentially.

In February 2022, the company authorized the addition of 5,000,000 shares of Class A or Class B (or a combination of the two) to its 2021 Repurchase Authorization, which had a remaining authorization to purchase 413,317 shares at the end of 2021.

Valuation

Crawford maintains two classes of stock which are substantially identical. The differences are with respect to voting rights and the company’s ability to pay greater cash dividends on the non-voting Class A Common Stock than on the voting Class B Common Stock. In addition, with respect to mergers or similar transactions, holders of Class A must receive the same type and amount of consideration as holders of Class B, unless different consideration is approved by the holders of 75% of Class A.

The two classes of stock typically trade in similar ranges, but divergence between the two stock prices can range from zero to $1.00.

Analysts' earnings per share estimates for 2022 are $0.85, and they predict EPS of $0.98 for 2023. These result in single-digit forward price-earnings ratios and may reflect the company’s margin headwinds and lack of near-term EPS growth. Or it could be the lack of awareness with very little analyst coverage and a market cap of only $380 million.

The dividend yield on both classes of stock are about the same at approximately 3.25%. The dividend payout ratio is well below 50%.

Guru trades

Gurus who purchased or added to their Crawford positions recently include Charles Brandeis, Jim Simons (Trades, Portfolio) and David Nierenberg (Trades, Portfolio). Gurus who have reduced their positions recently include Chuck Royce (Trades, Portfolio).

Conclusion

Crawford & Company appears to be undervalued as well as underfollowed. When margin headwinds dissipate, earnings growth should return, and the stock could return to 52-week high levels of above $10.00. The 3.25% dividend yield should provide some stability as the company executes on its margin improvement plans.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure