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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


May 29th 2009 Allstate
NYSE Symbol: ALL
Industry: Insurance
Price as of May 29th: $25.73

The financial crisis has focused primarily on the banks and brokerage firms. But the insurance companies, late to the party, have also been hit hard in this crisis and now have access to the bank's TARP money for government assistance. Like the banks, not all insurance companies or stocks are alike. Prudential and Metlife seemed to have navigated the crisis well along with the featured stock of the week, Allstate. Prudential and Metlife have watched their stock rebound smartly in the last two months. Allstate has rebounded, but remains very cheap. Just last week, Allstate declared they do not need access to government TARP money, making a bold statement regarding their financial strength, yet the stock trades well below historic valuation levels.
Back in the first week of May, Allstate missed sales estimates and earnings estimates by 39 cents. Earnings came in at 84 cents a share, 39 cents worse than the First Call consensus. Revenue fell 2.5% year/year to $7.88 billion, missing estimates by $300 million. On the conference call, managment indicated that property-casualty business delivered solid operating performance with an underlying combined ratio within full year guidance. The company generated $454 million in operating income as catastrophe losses and lower investment income negatively impacted results. Realized capital losses and non-cash charges for deferred acquisition costs and deferred taxes resulted in a net loss of $274 million for the quarter. Even with the disappointing quarter, Allstate's capital position remains strong with an estimated statutory surplus of $13 billion at Allstate Insurance Company and $3.4 billion at Allstate Life Insurance Company. In addition, there is $3.3 billion of assets at the parent company level at the end of the quarter.
Thanks to Allstate's financial strength with their strong capital and liquidity positions, they will not have to participate in the government TARP program. This is the strongest statement the company can make regarding their financial position. Allstate reiterated they have $12.2 billion in GAAP equity and $23.1 billion in cash or highly liquid assets in its investment portfolio at the end of the first quarter. These positions reflect proactive capital management steps taken over the past year, including suspending its share repurchase program, augmenting investment risk mitigation programs and reducing operating costs. In addition, since the end of the quarter, the company completed a $1 billion debt offering and reported a more than $1.5 billion improvement in its securities portfolio value as of May 13.
Even with these bullish statements regarding their financial position, Allstate's valuation is still very compelling. The stock is trading for 0.5 times sales, 6.8 times this years earnings, and 6 times next years earnings estimates of $4.10 a share. The stock is also trading just above book value of $22.6 a share. The stock also has a dividend yield of 3.2%, but unfortunately the stock when ex-dividend last week.
Following the earnings, Friedman Billings Ramsey upgraded Allstate with a $36 price target. They believe the earnings miss was for legitimate reasons. They noted that the company may suffer from negative earnings revisions and some underwriting pressure in the short run, but they believe that its' book value could expand rapidly, assuming the rally in the financial markets persists. Before the earnings, Stifel reiterated a buy rating. They indicate the stock trades for 6.8 times earnings, well below the stock's historical average PE of about 10.5 times forward earnings. Stifel's 12-month target is $43 which represents a multiple of 10.5 times the firm's 2010 earnings, in-line with the historical average. The $43 price target would translate into a 72% return from current levels. No wonder buyers are stepping back into the markets.