On Jan 7, 2014, Zacks Investment Research downgraded Fortegra Financial Corporation (FRF) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Fortegra Financial has been experiencing declining earnings estimates on the back of sluggish third-quarter 2013 results and its recent divestments. The company also delivered negative earnings surprises in 3 of the last 4 quarters with an average of 15.4%.
Additionally, this multi-line insurer underperformed the one-year S&P 500 index, which posed a growth of 24.6% against a negative return of 7.2% clocked by the company.
On Nov 1, Fortegra Financial reported third-quarter 2013 operating earnings per share of 19 cents, which missedthe Zacks Consensus Estimate by a penny. However, earnings were at par with the prior-year quarter figure.
Although higher service and administrative fees drove top-line growth by 14.5%, higher benefit claims as well as lower brokerage and ceding commissions marred the desired upside. Moreover, total expenses escalated 22.3%, due to higher personnel and operating costs. Consequently, net income plunged about 20% during the quarter along with a deteriorated EBITDA margin.
Given the uncertainty related to the regulations, sluggish market conditions and increasing claims and expenses vis-à-vis nominal top-line growth, we believe Fortegra Financial’s target of achieving its long-term goal of expansion appears delusionary. Although the divestment of its subsidiaries —Bliss & Glennon (B&G) and eReinsure to AmWINS Group Inc. —at the end of Dec 2013 inflated liquidity, it has also contracted the company’s operations, thereby showing no positive reaction among investors.
Meanwhile, the Zacks Consensus Estimate for 2013 declined 4.7% to 82 cents per share in the last 60 days. The same for 2014 also moved south 4.1% to 93 cents a share during the same period. No upward revision in estimates was witnessed for either year.
Other Stocks to Consider
While we prefer to avoid Fortegra Financialfor the time being, some better-ranked insurers in the industry are American International Group Inc. (AIG), CNO Financial Group Inc. (CNO) and Prudential Plc (PUK). All these stocks sport a Zacks Rank #1 (Strong Buy).