Travelers Earnings Preview: Why Travelers Could Beat Earnings Expectations Despite Missing On Revenues

by Trefis Team
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Travelers (NYSE: TRV) will release its Q4 and full-year 2019 results on Thursday, January 23. Trefis details expectations from the insurance giant in an interactive dashboard, parts of which we highlight below. We believe that Travelers will likely report an earnings beat for FY19, although its revenues would miss consensus. We expect the company’s core revenues to increase to $29.1 billion primarily due to growth in business and personal insurance segments. However, it would be still lower than the consensus estimate of $29.2 billion. Also, the EPS figure would improve to $9.93 – higher than the consensus earnings estimate of $9.58, due to a combination of higher revenues and a steady decrease in shares outstanding. Further, we believe that stronger-than-expected earnings for FY 2019 will likely offset the impact of a revenue miss, resulting in no significant movement in Travelers’ stock price once earnings are announced. Our forecast indicates that Travelers’ valuation is $142 a share, which is roughly at the same level as the current market price.

Trefis shines the spotlight on key assumptions and data for Travelers, and our hypothesis lays out one possible set of expectations. You can chime in with your expectations for Travelers’ FY19 earnings in our interactive dashboard.

 

(1) Travelers’ total revenues would have increase by 4.7% from $30.3 billion in 2018 to $31.7 billion in 2019, restricting the core revenues to $29.1 billion – slightly lower than consensus estimates

  • Trefis estimates Travelers’ 2019 core revenues (total revenues less investment of insurance premiums) to be $29.1 billion – marginally below the consensus estimate of $29.2 billion.
  • While total revenues have grown at an average annual rate of 5% from $27.6 billion in 2016 to $30.3 billion in 2018, we expect the growth rate to slightly reduce over 2019-2020, restricting the revenues to $31.7 billion in 2019.
  • This growth would mainly be driven by an Increase in Personal Insurance and Business Insurance segments.
  • Business Insurance has grown 5% over the last 2 years from $14.5 billion in 2016 to $15.2 billion in 2018, which was more than 50% of the total revenues. Further, the Commercial Automobile & Property sub-segment was the main revenue driver over the last two years.
  • Overall, we expect this segment to grow at an average annual rate of 4% over 2019-2020, with the figure for 2019 crossing $16 billion.
  • Similarly, Personal Insurance revenues have grown 18% from $8.5 billion in 2016 to $10 billion in 2018, mainly driven by growth in personal automobile premiums. We expect Personal Automobile Premiums to continue its growth trend in the near term and enable the segment revenues to cross $10.5 billion in 2019.
  • We expect Travelers to add $1.3 billion in incremental revenues by 2020, enabling the total revenue figure to cross $33 billion.

Our interactive dashboard analysis, ‘Travelers revenues: How Does Travelers Make Money?’, provides an interactive, in-depth view of the company’s revenues along with our forecasts and a comparison of trends with peers AIG, Hartford Financial and MetLife

 

(2) EPS is expected to increase by 6.2% from $9.35 in 2018 to $9.93 in 2019, which would comfortably beat consensus estimates

  • We expect Travelers’ 2019 earnings per share (EPS) to be $9.93 per Trefis analysis, 3.7% above the consensus estimate of $9.58 per share.
  • An increase in Revenues as detailed above coupled with a reduction in Shares Outstanding will drive EPS growth despite an expected increase in Total Expenses by 4.9%.
  • As we forecast Travelers’ Revenues to grow at a slower rate than Expenses in 2019 (4.7% vs. 4.9%), this will result in a slight reduction of 20 bps in Travelers’ Net Income Margin figure from 8.3% in 2018 to 8.1% in 2019.
  • For 2020, we believe that revenue and expenses would grow at a similar rate, enabling the net income margin figure to hover around the 2019 figure of 8.1%.

 

(3) Stock price estimate around the market price

  • A trailing P/E multiple of 14.3x looks appropriate for Travelers’ stock, which is slightly lower than the current implied P/E multiple of 14.7x
  • Trefis’ forecast for Travelers’ 2019 earnings is slightly higher than the market estimates, although P/E multiple is lagging. This works out to a fair value of $142 for Travelers’ stock as opposed to the current market price around $141.

 

See all Trefis Price Estimates and Download Trefis Data here

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