Is Travelers’ Stock Still Attractive At $112?

Despite a 30% rise since the March 23 lows, at the current price of around $112 per share we believe Travelers’ stock (NYSE: TRV) can gain some more. Travelers’ stock has rallied off the recent bottom of $88 but has recovered less than the broader S&P 500 index which moved almost 40%. While investor sentiment toward insurance companies has improved over the recent weeks driven by government stimulus and net market gains, Travelers is slightly lagging the overall market as investors are cautious about the impact of lower consumer demand on personal insurance premiums which contributes a significant revenue share. The stock is currently down 15% from levels seen in late 2019.

The company has steady revenue growth over recent years with positive growth in P/E multiple. We believe the stock is likely to see some upside once the weakness from a potential recession driven by the Covid outbreak passes. Our dashboard ‘What Factors Drove 19.8% Change In Travelers Stock Between 2016 And 2019?’ has the underlying numbers.

Some of this rise of the last 3 years is justified by the roughly 14% growth seen in Travelers’ revenue from 2016 to 2019, which translated into a 13% growth in Net Income figure. Notably, the net income margin decreased from 10.8% in 2016 to 8.2% in 2019, as claims and claim adjustment expenses increased in terms of % of revenues.

Travelers’ PE multiple changed from around 11x in 2016 to 13.5x at the end of 2019. While the company’s PE has reduced to about 11.5x now, there is some upside when the current PE is compared to levels seen in the past years – PE of 13.5x at the end of 2019 and 12.5x in late 2018.

So what’s the likely trigger and timing for further upside?

The ongoing pandemic is likely to result in lower premiums for the company, as customers and businesses would be more focused on the short term. Further, income from investment of insurance premiums – which is very critical for its profitability – is likely to suffer due to lower yields driven by the economic slowdown. However, the recent improvement in the securities market has given some hope to this revenue stream. While the company’s result for Q1 saw some growth in revenues, we believe that Q2 results will confirm the hit to its revenue. It is also likely to accompany a lower Q3 as-well-as 2020 guidance.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. 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 vs. historic valuations become important in determining value.

While Travelers’ stock presents some upside potential, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising. 

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