Does Travelers’ Stock Have Growth Potential Despite Its Q3 Earnings Miss?

Travelers (NYSE:TRV) has seen its stock price fluctuate significantly over the year, with the figure soaring 34% between January and July to reach $155 before trending lower to the current level around $136. Overall, the stock has rallied 19% since the beginning. But we believe that the stock is slightly undervalued. Trefis details the key components of Travelers’ valuation in an interactive dashboard, along with our forecast for full-year 2019, and estimates the fair value of Travelers’ stock to be $142 per share – roughly 5% more than the current market price.

In Q3 2019, Travelers reported Total Revenues of $8 billion – up 4% y-o-y. This increase could be attributed to a 5% y-o-y jump in Personal Insurance segment followed by a 3% increase in Business Insurance revenues, partially offset by a 4% drop in revenue from investment of insurance premiums. Further, total expenses jumped 10% y-o-y due to a spike in claims as well as elevated operating expenses. This dragged the company’s net income figure 44% lower from $709 million in Q3 2018 to $396 million in Q3 2019. While Travelers’ revenues from investment of Insurance Premiums are expected to struggle in the near term due to challenging macroeconomic conditions, we expect the insurance giant to maintain a growth rate of around 5-6% in 2019 on the back of growth in insurance premiums across segments.

We can break down the Travelers’ stock price estimate into 4 factors:

Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio

Growth In Business Insurance Division Would Enable Travelers’ Revenues To Cross $31.7 Billion In 2019

• Total Revenues have increased from $26.8 billion in 2015 to $30.3 billion in 2018, and could grow 5% to $31.7 Billion in 2019
• Travelers is expected to report $31.7 billion in Total Revenues for 2019, which is 5% more as compared to the previous year.
• Personal Insurance revenues are expected to increase 5% y-o-y thanks to a 5% increase in revenues for the Business Insurance segment and a 7% jump in Bond & Specialty Insurance revenues from higher renewal premium rates and improving retention rates.
• Notably, Investment of Insurance Premiums is expected to generate $2.6 billion in 2019, which is at the same level as the 2018 figure.

We capture the factors that have driven changes in revenues of Travelers’ segments over recent years along with our forecast for the next three years in an interactive dashboard.

Although Net Income Margin Would Slightly Decrease, Growth In Revenues Would Boost The Net Income Figure

• Travelers is expected to have a Net Income of $2.6 billion in 2019 which is 2% more than the previous year figure. This increase would be driven by growth in revenues, partially offset by higher effective Tax Rate as compared to 2018.
• Net Income Margin would see a slight decrease from 8.3% in 2018 to 8.1% in 2019, mainly driven by 5% increase in total expenses due to higher claims and claims adjustment cost.

This Lends Support To A $142 Price Estimate For Travelers’ Shares

• Travelers has regularly invested in share repurchases to boost shareholder returns. Its share repurchase is likely to touch $1.6 billion for the full year 2019.
• Lower outstanding shares coupled with a higher Net Income figure should result in Travelers’ EPS figure increasing to $9.93 in 2019.
• Using a 14.3x P/E Multiple on expected 2019 EPS of $9.93, this works out to our price estimate of $142 for Travelers’ Stock.

Details about how Travelers’ P/E multiple compares with peers MetLife, AIG and Hartford Financial is available in our interactive dashboard.

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