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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


February 12th 2010 Hartford Financial
NYSE Symbol: HIG
Industry: Insurance
Price of as 2/12: $23.45

The markets remain in corrective phase even though earnings and the economy seem to be on the mend. The recent correction has brought out the bears once again trying to push the markets lower, but valuations remain extremely low which should limit the downside. The rally in the financials has stalled even though most are easily beating estimates. In the short term plenty of uncertainty regarding new regulations has kept investors on the sidelines. The insurance companies are in a similar situation boosting earnings, but the stocks are moving sideways. One example is this weeks featured stock, Hartford Financial. Hartford raised earnings dramatically in January causing the stock to jump, but then pull back. The quality of earnings is not what you want. There is plenty of volatile and risk in Hartford's shares, but investors with a long term horizon should be rewarded once the quality of earnings eventually improve.
After raising estimates in January, Hartford reported core earnings this week of $689 million, or $1.51 a share, easily beating estimates of $1.40 a share. Hartford continues to gain traction with new business with written premium growth of 21% in small commercial, and 7% in middle market over the prior year period. Written premiums for The Hartford's property and casualty operations in the fourth quarter were $2.4 billion, compared with $2.5 billion in the fourth quarter of 2008. The decline in premium was due to macroeconomic-driven exposure reductions and soft pricing in commercial lines. Hartford continues to reduce risk in the investment portfolio by selling more than $1 billion of real estate-related securities. Looking to 2010, Hartford sees core earnings of $3.70 to $4 a share. Analysts polled by Thomson Reuters were expecting profit of $3.96 a share for this year. Thanks to the improving earnings, the book value per common share rose to $38.92 compared to $37.90 in the third quarter.
Hartford remains bullish long term, but the chief executive made a statement indicating that although the company posted strong earnings in the fourth quarter, the economy and market conditions remain uncertain.
The insurer was more apprehensive than usual about its annual profit estimate. Hartford sells annuities and other savings and investment products, so the company's results are sensitive to the equity markets.
As mentioned the quality of earnings has not improved much, but the stock is extremely cheap. Currently the stock is trading for 6 times this years earnings, less than one times sales, and well below book value of $38 a share which continues to improve. The analysts remain cautious on the insurance stocks waiting for the earnings quality to improve. FBR Capital maintained their market perform rating and reiterated their $26 target, which is just 7 times 2010 operating earnings. Barrons last week wrote another positive piece on Hartford following up an article from a year ago. Barrons believes book value will rise to $45 a share and therefore should trade for $45, more than a double from current levels. The dividend should also get boosted when the earnings improve. Eventually the financial crisis will subside and investors will flock back to the financials and insurance stocks.