Travelers (NYSE: TRV) is scheduled to report its fiscal Q1 2021 results on Tuesday, April 20. We expect Travelers to beat the consensus estimates for revenues, while the earnings are likely to underperform expectations. The insurance giant managed to surpass the revenues and earnings estimates in each of the last two quarters, mainly driven by growth in premiums and net investment income. Travelers’ full-year revenues were marginally ahead of the 2019 figure. The company’s net investment income suffered in 2020 on a year-on-year basis, primarily due to the lower interest rate environment. This was followed by lower than average growth in the insurance premiums. That said, both the premiums and net investment income saw some improvement in the second half of the year driven by some recovery in the economy. We expect the same trend to drive the first-quarter FY2021 results as well.
Our forecast indicates that Travelers’ valuation is around $150 per share, which is 4% below the current market price of around $155. Look at our interactive dashboard analysis on Travelers’ pre-earnings: What To Expect in Q1? for more details.
(1) Revenues expected to be ahead of consensus estimates in Q1
Trefis estimates Travelers’ fiscal Q1 2021 revenues to be around $7.91 billion, 5% above the $7.54 billion consensus estimate. Travelers’ revenues of $32 billion for the full year 2020 were marginally ahead of the 2019 figure. This could be attributed to two main reasons – first, lower growth in premiums (3% y-o-y) as compared to the CAGR of 5% over 2016-2019; second, 10% y-o-y drop in the net investment income due to the interest rate headwinds. The interest rates have decreased due to the zero-rate policy of the Federal Reserve in response to the Covid-19 crisis. That said, the premiums and net investment income saw some recovery over the recent quarters and the trend is expected to continue in the first quarter of FY2021.
Due to the Covid-19 crisis, businesses and individuals were more focused on short-term, than long-term survivability. This led to slower growth in insurance premiums in 2020. However, with recovery in the economy and the expected mass availability of the Covid-19 vaccine, premiums are likely to improve. Further, the interest rates are unlikely to see an immediate revival to the pre-Covid-19 levels – the Fed has decided to maintain its benchmark rate near zero (as per the latest update on March 17th). But growth in net invested assets coupled with some improvement in the investment yield will likely push the net investment income up. Overall, the TRV’s revenues are likely to remain around $33.6 billion in FY2021. Our dashboard on Travelers’ revenues offers more details on the company’s segments.
2) EPS likely to miss the consensus estimates
Travelers’ Q1 2021 adjusted earnings per share (EPS) is expected to be $2.51 per Trefis analysis, almost 2% below the consensus estimate of $2.56. The company’s profitability figures grew 3% y-o-y to $2.7 billion in 2020. This improved the EPS figure from $9.92 to $10.52. This could be attributed to a slight decrease in total claims & expenses as a % of revenues. We expect the same trend to continue in the FY2021 Q1 results.
Travelers’ revenues are expected to grow by 5% y-o-y in FY2021. Further, the net income margin is likely to remain around the same level as the 2020 figure. Overall, it will enable TRV to report an EPS of around $11.49 in the current year.
(3) Stock price estimate 4% lower than the current market price
Going by our Travelers valuation, with an EPS estimate of around $11.49 and a P/E multiple of around 13x in fiscal 2021, this translates into a price of $150, which is 4% below the current market price of around $155.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
While Travelers stock is trading close to its fair value, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Colgate Palmolive Co. vs. Regeneron Pharmaceuticals shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.