Markel Stock Is Worth Considering At $990

After close to 35% gain since the March 23 lows of the last year, at the current price around $990 per share, we believe Markel Corporation Stock (NYSE: MKL) has more room to go. Markel, a holding company for specialty insurance, reinsurance, and investment operations, has seen its stock rally from $742 to $990 off the March bottom compared to the S&P which moved around 70% – the stock is lagging the broader markets by a huge margin and has lost 16% over the last 12 months. That said, there is a mismatch between its stock and revenue growth – Markel’s top-line has increased 12% to a consolidated figure of $8.96 billion for the last 4 quarters from the consolidated figure of $7.99 billion for the 4 quarters before that. However, the company’s net investment gains have suffered in the first quarter of 2020 and are negative on a cumulative nine months basis, which is the main reason behind cold investor sentiment toward the stock.

Markel’s stock has partially reached the level it was at before the drop in February 2020 due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential as it has reported positive growth in operating revenues and its valuation implies it has further to go.

The company’s revenues grew around 39% from $6.8 billion in 2018 to about $9.5 billion in 2019. However, its net income figures jumped from -$128 million in 2018 to $1.79 billion in 2019, primarily driven by lower operating expenses as a % of revenues from 99% to 74%.

While the company has seen steady growth in revenues and revenue per share (RPS) over 2018-2019, its P/S (price-to-sales) multiple has decreased. We believe the stock is likely to see some upside despite the recent growth and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard Buy Or Fear Markel Corporation Stock? has the underlying numbers.

Markel’s P/S multiple has slightly decreased from 2x in FY 2018 to just below 2x in FY 2019. While the company’s P/S is close to 1x now, there is an upside when the current P/S is compared to levels seen in the past years – P/S multiple of around 2x at the end of 2019 and 2018.

So Where Is The Stock Headed?

Markel has diverse revenue streams – insurance business and investment in public and private companies. It generated around $4.1 billion in earned premiums in the first nine months of 2020, up 10% y-o-y. Further, its Markel Ventures business that includes its controlling interests in a diverse portfolio of businesses that operate outside of the specialty insurance marketplace reported a 28% y-o-y growth over the same period. Despite this, its nine months cumulative revenues for 2020 have decreased by 8% y-o-y to $6.4 billion, primarily due to a decline in net investment gains (losses) on its large portfolio of stocks from $1.07 billion to -$230.9 million. That said, net investment gains (losses) depend on fluctuations in equity markets, and have benefited in the second and third quarters due to the strong market rally, after witnessing a significant slump in the first quarter of 2020. Further, Markel generates the majority of its revenues from insurance premiums and Markel Ventures. Both these businesses have shown strong growth in the year and are expected to follow the same trend in the subsequent quarters. Overall, the company is expected to report strong fourth-quarter 2020 results, which is likely to boost Markel Corporation’s stock price in the near future.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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