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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

Travelers

June 5th 2009 Travelers
NYSE Symbol: TRV
Industry: Insurance
Price as of June 5th. $43.75

How the mighty have fallen. One of the top financial minds, Sandy Weill ran Travelers in the 1990s, bought Salomon Smith Barney, then made the blockbuster deal to buy Citicorp to create the largest financial titan in the world. At the turn of the century, Sandy Weill left Citigroup, Travelers was spun off, and then Citigroup ran itself into the ground. Fast forward to 2009, Citigroup is getting taken out of the Dow Jones Industrial Averages only to be replaced ironically with Travelers. Travelers has weathered the financial storm well, not getting caught up in the toxic assets that took down Citigroup and a number of other financial giants. Travelers doesn't need any government money and actually restarted their share repurchase program. Even though Travelers has performed well, the stock still trades for less than book value, providing great value to shareholders.
This week, Travelers had an analyst meeting. Travelers expects full year 2009 operating income per diluted share to be in the range of $4.55 to $4.95, an increase from the previously announced range of $4.50 to $4.90 due to an increase in assumed share repurchase activity. This guidance includes the reported results for the first three months of 2009. Estimates for the remainder of 2009 are based on a number of assumptions including catastrophe losses of $552 million pre-tax and $360 million after-tax, or $0.63 per diluted share for the full year. No significant change in average invested assets, after taking into account dividends as well as approximately $1.750 billion of share repurchases for the full year. Capital remains at or above all target levels for the rating agencies. Travelers continues to generate excess capital. Leverage debt to capital ratio is 18.9% better than the targeted 20.0% range. Total capital is $31 billion. There is a low
level of maturing debt coming up including $2 million in 2009, $273 illion in 2010, and $11 million in 2011. Travelers is not reliant on the commercial paper market. They have repurchased $575 million or 14.4 million shares through June 2, 2009, average purchase price per share of $39.96.
Friedman Billings Ramsey upgraded Travelers last month with a $60. The company's very conservative bond portfolio includes $5.7 billion of short-term securities on which Travelers earns a very modest return. An increase in duration or decrease in credit quality of newly purchased securities could boost investment income, thus transforming the investment portfolio from super-conservative to conservative. At the end of the day, Friedman believes that Travelers is a solid franchise with book value of $45. The analyst believes Traveler's shares are quite undervalued and simply do not believe that the franchise is worth less than book value.
The valuation for Travelers looks great. Travelers trades for 1 times sales, 8 times earnings, and less than its book value of $45.12 a share. The company has $10 a share in cash and sports a modest dividend of 2.8% yield. Traveler's attractive valuation should help the Dow Jones Industrial Averages going forward.