BHF - Brighthouse Financial - Momentum Isn't Slowing And Stock Looks Undervalued

2023-07-15 05:32:45 ET

Summary

• Brighthouse Financial Inc has been expanding rapidly since its spinoff from MetLife Inc in 2017, with $118 billion in total investments and $85 billion in fixed maturity securities.
• The company, which operates as a life insurance and annuity provider in the US, has been coping with macroeconomic headwinds and stabilizing revenues, maintaining a strong liquid position with $1.1 billion in liquid assets.
• Despite trading at a significantly lower multiple than the sector, BHF has a potential upside of 77% with a price target of $85 in 2023, given the EPS estimates.

Introduction

It's not often you find a company trading at this low of a valuation with solid earnings estimates. Since the spinoff, Brighthouse Financial Inc ( BHF ) has rapidly been expanding and now boasts $118 billion in total investment. $85 billion of those being in fixed maturity securities. Major tailwinds in recent years were the pandemic, which highlighted why having life insurance is so crucial, but also annuities.

Momentum is continuing as they are coping with macroeconomic headwinds and stabilizing revenues. BHF maintains a very strong liquid position in terms of capital and this has helped to navigate efficiently in the last few years, Q1 had them with $1.1 billion in liquid assets. Buybacks of shares are continuing and this is setting the tone for BHF being a long-term pick. I view them as able to bounce back and provide investors with solid returns over the coming years.

Company Structure

Brighthouse Financial is a spinoff from MetLife, Inc. ( MET ) which happened back in 2017. Since then, the share price has been quite volatile, with the bottom reached in 2020 at around $23 per share. Since rebounding strongly though to nearly $50 per share.

The company operates as a life insurance and annuity provider in the United States. Within BHF there are three segments right now, those being Annuities, Life, and Run-Off. In the first segment, BHF offers customers variable and fixed-income annuities for contract holders. They provide services associated with wealth transfer and income security. In the second segment, they provide universal, whole, and life products for policyholders in need of financial security and wealth transfers. Lastly, the Run-Off segment focuses on managing structures settlements, and pension risks. Brighthouse Financials was founded back in 1863 and has had a long history of growing its business.

They maintain a very solid investment portfolio which is the backbone of the investment case here really. With $118 billion in total investments and $85 billion of that in fixed maturity securities and a large portion of that in solid investment-graded securities of A or better. Future tailwinds for the company will be the easing of inflation and lower interest rates which should provide stronger operational performance by the company as expenses decrease and margins expand.

It's worth mentioning that BHF also holds around 19% of its total investment portfolio in mortgage loans, valued at over $13 billion currently. Here a large portion is with apartments, and the DSCR is very strong at a ratio of over 2. BHF hasn't overleveraged itself, despite growing so quickly with its investment portfolio. This leaves them in a strong position still to rebound once we enter a period of lower inters rates, as volumes should increase.

Earnings Transcript

From the last earnings call transcript that BHF published on May 9, 2023, CEO Eric Steigerwalt highlighted some key features that the company is rolling out and how their performance has so far been.

• As we've said previously, we plan to introduce a new life insurance product later this year, which we expect will further diversify and strengthen our Life product suite. As we execute on our business strategy, we remain disciplined in our financial and risk management. Maintaining balance sheet strength is imperative in order to support our distribution franchise and the growth and evolution of our business mix.

I view this as another step for BHF to establish strong streams of revenues and be able to execute once the market environment becomes “smoother” to operate in. I don’t necessarily view this as BHF will see stronger earnings in the coming quarters, but it should mean that we see more of a floor for margins, perhaps.

Valuation & Comparison

Over the last 12 months, the return on investment in BHF has been larger than one in the SPY. BHF is up nearly 24% compared to the SPY with 18%.

Over the coming years, I think that an outperformance like this might continue to happen given the low multiple that BHF trades at, and if given a premium more similar to the sector it would yield a very strong return right off the back right now.

The comparison above highlights some of the points I have made before that BHF is trading at a significantly lower multiple than the sector, but also to its NAV price as well. This opens up the possibility in my opinion of a major upside potential once BHF starts to earnings similar to what is being estimated , around $14.18 per share in 2023. A multiple of 6 to that would set a price target of $85 in 2023, a 77% upside potential. But until there is some strengthening on the balance sheet like growing assets to boost equity, then a lower multiple will be applied. However, I think there is some unjustified criticism of BHF, looking at the balance sheet they do have more cash at hand than debt which puts them in a very flexible position, one that should be rewarded with a higher valuation in my opinion.

Risk Associated

We have previously seen that inflation affected the policy retention rate for the business. As an example, in 2022 the business had 2.5 million policies active, down from 2.7 million in 2021.

This has visibly shaken the bottom line of the company, but as we are seeing a somewhat high likelihood of lower interact rates in 2024 as inflation is easing, future earnings estimates are rising. Leading up to 2024 and beyond, however, we need to carefully watch how the efficiency ratio of the business develops. Surprisingly strong operational performances will lead to a higher multiple being applied. But a resurgence in inflation could lead to strong short-term headwinds for BHF.

Investor Takeaway

Right now Brighthouse is trading at a very low multiple on the forward basis as estimates suggest a strong upswing in EPS as potentially lower interest rates and a reduction in inflation will be tailwinds for the company. The strategic approach the company has is however setting them up very well, and I think investing right now will prove to yield a return outperforming the broader markets.

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