In 2018’s bull market, many financial services companies have succeeded and even thrived. However, some have struggled, hitting specific snags. One such straggler is Markel Corp. (MKL, Financial). The financial giant headquartered just outside Richmond, Virginia, is famous for having insured the ruby slippers ofWizard of Oz fame. But lately, the venerable company’s performance has not been stellar. Tht is not to say that Markel has been suffering badly, but its performance has definitely not dazzled or defied expectations.
Markel who?
Marke’s story began in the 1930s, with the business first insuring passenger buses. From those humble beginnings, the company has grown to include nearly 75 offices worldwide. And Markel has not forgotten its past. The company still places great emphasis on its reputation and strong client relationships.
Markel remains strong in a highly competitive business, leveraging long-standing relationships to its benefit. Its history and past financial performance should not be overlooked. They are impressive indicators of customer loyalty and chances for future positive performance. Markel has the infrastructure and relationships in place for success.
Financial performance is so-so
Markel’s financial performance is a mixed bag. Revenue has grown, but so have costs. Gross profit has been inconsistent. Revenue for the past three years came out to $5.4 billion, $5.6 billion and $6.1 billion, respectively. That shows growth, but the rate of growth is far from scorching. However, gross profit dropped from $2.1 billion in 2016 to $1.6 billion in 2017.
Why the 25% drop? A significant increase in cost of revenue.
Now, this drop in profit does not mean Markel’s financial future is bleak. The stock is currently trading at a moderately reasonable 45 trailing price-earnings multiple and consistently bringing in positive numbers, even when certain quarters take a significant dip.
Let’s look at earnings per share and earnings surprise to further evaluate Markel’s financial heft.
Earnings per share was $2.82, $9.94, ($18.82) and ($6.64) over the last four quarters – a highly mixed bag. When taken in context of expectations, it looks worse. Earnings per share surprises over the last four quarters are as follows: -32.3%, 58.5%, -4.4% and -22.3%. Despite one very positive quarter, three of the last four quarters have seen earnings per share expectations misses, including two over 20% and one that saw a massive decline in earnings per share.
Boding ill for the future?
In taking a closer look at earnings per share, we can see some cause for concern. First, earnings missed expectations during three of the last four quarters, twice by quite a lot. Why? From what we can tell, Markel’s revenue missed key targets during 2017 as the company faced increased financial oversight pressure and competition. Will this effect continue into 2018? That remains an open question. The most recent quarter, earnings per share missed expectations by over 22%. Markel’s investors should hope for a 2018 turnaround.
Secondly, Markel recorded a loss of $18.82 per share for the reporting period ending in October 2017. This was due to outside factors somewhat beyond Markel’s control. Due to massive property losses from a series of natural disasters including Hurricanes Harvey and Maria, Markel saw its bottom line hit. Further, Markel’s investment management wing called CATCo saw a significant quarterly reduction in its investment fee income following these disasters.
Now, the big question is: How will weather-related disasters affect Markel in the future? We know from a vast consensus of weather scientists that weather-related disasters are only going to become increasingly frequent, severe and destructive. Markel will therefore be negatively affected. It is important that Markel’s business executives make plans for such eventuality.
There’s a silver lining
Markel continues to have financial heft, a long history and size advantages that will help it succeed into the future. The company is also trading at a very reasonable price, at below 2x book value, meaning there is space for the stock price to rise.
We also see positive trends for the insurance market generally, and even larger behemoth Berkshire Hathaway shows no signs of slowing down. If Markel can correct some of its problems, then it is in a good position for stock growth. Further, it never hurts to bet on a company with size and history. Those factors are key.
Verdict
A fair mix of both good and bad news leaves us with a fairly middle-of-the-road opinion on Markel’s stock and its future prospects. Markel should be a safe bet, but not one that will reap any extraordinary rewards.
Disclosure: I/We own no stocks discussed in this article.
