Thursday, December 8, 2011

Hartford Financial Plummets on 2012 Outlook

Or at least that is the theory. Hartford Financial (HIG) dropped 8% today on the back of disappointing news out of Europe and supposedly the tepid news from the investors presentation today.

The news out of the conference appears very bullish for the stock regardless of the headlines. The company expects to have core earnings of $3.45 next year which is generally inline with analyst estimates. More importantly though, the stock currently trading just above $17 has a forward PE.

More importantly, HIG already has a book value of $46 and that will approach $50 by the end of 2012. Anybody buying at these levels would get an incredible 200% gain once this investment is valued at fair value. Trading at 1x BV has historically been low for the sector as well.

A competitor in Lincoln National (LNC) was down 5% today so one can presume that the stock only fell 3% due to the news from the presentation. The main thrust was clearly Europe, though I just don't get why investors want to sell a stock so far below book value no matter what the earnings are next year. As long as this company is making money, its worth more than book.

One real big positive for the stock price could be the plans for a ramped up stock buyback. HIG can automatically buy stock at 40 cents on the dollar. That will be a huge boon for shareholders. Share count will fall quickly and earnings will jump if it can buy stock below $20. It doesn't really add up that the company has cash to buy stock, but investors are willing to sell it below book.

What is the market thinking?


Per a Reuters story:



  • S&P Capital IQ analyst Cathy Seifert, in a note, said the company "is still a work in progress" but added the stock was undervalued compared to the sector.
  • Barclays Capital analyst Jay Gelb said there was downside risk to the Hartford's 2012 guidance, particularly if the company has to add to reserves in its property and casualty business.
  • The Hartford said it expects core earnings of $3.30 to $3.60 per share next year. Analysts polled by Thomson Reuters I/B/E/S expected anything from $3.22 to $4 a share next year, with a mean estimate of $3.51.
  • For the current quarter, the company said it expects earnings in a range of 80 cents to 85 cents per share. Analysts on average expected earnings of 83 cents.
  • The Hartford also plans to ramp up a share buyback program soon, with a goal of completing it by early in the second quarter.

Disclosure: Long HIG and LNC. Please review the disclaimer page for more details.


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