[Updated 03/12/2021] MetLife Valuation Update
MetLife stock (NYSE: MET) has gained more than 150% since the March 23 lows of the last year and at its current price of $60 per share, it is trading 4% above its fair value of $58 – Trefis’ estimate for MetLife’s valuation. MET, which is one of the largest global providers of insurance, annuities, and employee benefit programs, outperformed consensus estimates in its recently released fourth-quarter results. It reported total revenues of $19.4 billion, which is 13% more than the year-ago period. The growth was primarily driven by a 17% y-o-y increase in net premiums coupled with a 13% rise in net investment income – the net investment income benefited from the rise in variable investment income due to higher private equity returns. However, policyholder benefits & claims as a % of revenues rose from 68.5% to 70.9% in the fourth quarter, resulting in a 77% y-o-y drop in the net income figure.
The company reported $67.8 billion in revenues for the full-year 2020 – 3% lower than the 2019 figure. The net premiums were marginally below the year-ago value, mainly driven by the Covid-19 crisis as businesses and individuals were more focused on the short term. However, the U.S segment premiums, which constitute around 40% of the top-line, still managed to report a slight growth in the year. Further, the net investment income was down by 9% y-o-y due to lower investment yields, partially offset by positive net flows in the investment portfolio. Additionally, the adjusted net income margin decreased from 8.2% to 7.6% in the year. That said, the current year is expected to be on similar lines. MET’s premiums are likely to report stagnant growth. Further, the investment yields are unlikely to recover to the pre-Covid-19 levels anytime soon. Overall, the above factors are expected to restrict MetLife’s revenues to $66.5 billion in FY2021. The net income margin is likely to see some improvement in the year, leading to an EPS of $6.45 for FY2021. This coupled with a P/E multiple of around 9x, will lead to the valuation of $58.
[Updated 12/04/2020] MetLife Stock Has Reached Its Near Term Potential
MetLife stock (NYSE: MET) has gained more than 100% since the March bottom and at its current price of $48 per share, it is marginally above its fair value of $47 – Trefis’ estimate for MetLife’s valuation. MET, a leading provider of insurance, employee benefits, and financial services, outperformed the consensus estimate for earnings and revenues in its recently released third-quarter results. It reported Total Revenues of $16 billion, which is 14% less than Q3 2019. This drop was primarily driven by a jump in net derivative gains (losses) from $1,254 million in the year-ago period to -$581 million in Q3 2020. Further, total premiums decreased by 8% on a year-on-year basis.
We expect the company to report $65.9 billion in revenues for 2020 – around 5% lower than the year-ago period, mainly driven by a 7% drop in the U.S segment, which contributed 51% to the top line in 2019. Our forecast is based on our belief that the economy is likely to see some improvement in the last quarter, benefiting the total premiums amount and investment income over the coming months. The net income margin for the year is expected to decline from 8.2% to 7.8% due to higher operating expenses, reducing the EPS figure to $5.60 for FY2020. Thereafter, MetLife revenues are expected to increase to $69 billion in FY2021, on the back of growth in the U.S business. Further, the net income margin is likely to improve due to lower policyholder benefits and losses incurred, leading to an EPS of $6.35 for FY2021. This coupled with a P/E multiple of just above 7x, will lead to the valuation of $47.
[Updated 9/10/2020] MetLife Stock Can Touch $45 In The Near Term
MetLife’s stock (NYSE: MET) lost more than 50% – dropping from $52 at the end of 2019 to around $24 in late March – then spiked 60% to around $38 now. This implies it’s still 26% lower than the start of the year.
There were 2 clear reasons for this: The Covid-19 crisis and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plunged. MetLife, which is a leading provider of insurance, employee benefits, and financial services, is likely to get negatively affected by this, as the total premiums and net investment income could suffer. However, the multi-billion-dollar Fed stimulus in late March helped arrest the negative market sentiment, which is also evident from the stock recovery after that point.
But this isn’t the end of the story for MetLife’s stock
Trefis estimates MetLife’s valuation to be around $45 per share – about 20% above the current market price – based on an upcoming trigger explained below and one risk factor.
The trigger is an improved trajectory for MetLife’s revenues over the second half of the year. We expect the company to report $66.7 billion in revenues for 2020 – around 4% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to see some recovery in the third quarter. This is also validated from the recently released U.S consumer spending data which indicates an m-o-m growth of 8.5% in May followed by 5.6% in June and 1.9% in July. If the same trend endures in the next few months, it is likely to improve the total premiums and net investment income, which is very critical for the firm’s profitability. This, in turn, would help the revenue trajectory over the coming months. The net income for the year is expected to drop to $5.1 billion – down 15% y-o-y, shrinking the EPS figure to $5.58 for FY2020.
Afterward, MetLife’s revenues are expected to slightly improve to $68.3 billion in FY2021, mainly driven by growth in the U.S and Asia segments. Further, the net income is likely to grow by 5% y-o-y, resulting in an EPS of $6.07 for FY2021.
Finally, how much should the market pay per dollar of MetLife’s earnings? Well, to earn close to $6.07 per year from a bank, you’d have to deposit around $665 in a savings account today, so about 110x the desired earnings. At MetLife’s current share price of roughly $38, we are talking about a P/E multiple of just above 6x. And we think a figure closer to 8x will be appropriate.
That said, insurance is a risky business right now. Growth looks less certain, and near-term predictions are low on optimism. What’s behind that?
MetLife has an average account balance of around $405 billion (as per FY 2019 data). Its net investment income has contributed around 25% of the total revenues over the last three years and is very critical for the company’s profitability. That’s why its business model is very sensitive toward changes in investment yields. While the S&P 500 index is on a growth trajectory (up 55%) since the March bottom, any further deterioration in the economic situation or a sudden jump in the Covid-19 case count can reverse the momentum and harm MET’s top line.
The same trend is visible across MetLife’s peer – Prudential Financial. Its revenues are also likely to suffer in FY2020 due to lower premiums and a drop in investment income. This would explain why Prudential Financial currently has a stock price of around $68 but looks slated for an EPS of around $10.09 in FY2021.
Although MetLife stock may not be attractive, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Apple vs. Emergent Biosolutions shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.