Meadowbrook (MIG): A Strong Sell on Dull Earnings & Outlook
On Nov 15, Zacks Investment Research downgraded Meadowbrook Insurance Group Inc. (MIG) by a notch to a Zacks Rank #5 (Strong Sell) from a Zacks Rank #4 (Sell).
Why the Downgrade?
Earnings estimates for Meadowbrook have taken a downward turn following third-quarter 2014 results, lower premiums and investment returns. Notably, the company has delivered negative earnings surprises in three of the last four quarters, with an average miss of 85.8%.
Additionally, this multi-line property-casualty and specialty insurer underperformed the one-year S&P 500 index, which posted growth of 13.4% against a negative return of 14.5% clocked by the company.
On Nov 5, Meadowbrook reported third-quarter operating earnings per share of 6 cents. Results noticeably lagged both the year-ago quarter figure by 40% andthe Zacks Consensus Estimate by 33.3%.
A year-over-year fall of 10.7% in premiums earned and a 5% decline in investment income induced top-line reduction of 7.9%. Although total expense fell 7.9%, combined ratio deteriorated by 50 basis points to 103.5%, reflecting higher underwriting expenses. Moreover, operating cash flow plunged 52.5% to a mere $9.7 million, primarily due to lower premium volumes.
While financial leverage improved from 2013-end, it is still pegged at a cautious level. Lack of share repurchases have also raised the share count, further diluting earnings per share.
Meanwhile, management projected gross written premiums in the band of $715−725 million (down from the prior estimate of$775−800 million) for 2014 and about $750−775 million for 2015. The estimations being substantially lower than $944 million earned in 2013, naturally add to the investors’ concerns.
Following the earnings release, the Zacks Consensus Estimate for 2014 tanked 20% to 40 cents per share in the last 30 days. Moreover, the estimate for 2015 is pegged at 50 cents a share, down 16.7% over the same period. These reflect cautious estimates, at the lower-end of the company’s earnings guidance of 40−45 cents and 50−60 cents per share for 2014 and 2015, respectively. No upward revision in estimates was witnessed for both the years.
Other Stocks to Consider
While we prefer to avoid Meadowbrook at present, better-ranked insurers worth considering include American International Group Inc. (AIG), Fortegra Financial Corp. (FRF) and Radian Group Inc. (RDN). All these stocks have a Zacks Rank #2 (Buy).
Read the Full Research Report on AIG
Read the Full Research Report on RDN
Read the Full Research Report on MIG
Read the Full Research Report on FRF
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