IAK - Cincinnati Financial: Near Fair Value With Robust Earnings And Dividend Growth

2023-03-07 16:40:28 ET

Summary

• Insurance equities performed very well in 2022, but recent price action has been less enthusiastic.
• After trading higher following earnings in February, I see shares of CINF as near intrinsic value, but big growth prospects put upside to my valuation assessment.
• On technicals, the stock has underperformed its peers in recent months and a trading range is developing on the chart.

Insurance stocks had a big 2022 versus the broad market. But recent relative strength has been somewhat weak. I profiled one ETF in the space earlier this week. Cincinnati Financial indeed rallied strongly earlier this year but is now undergoing a significant pullback, and I see shares as near fair value.

IAK Insurance ETF vs S&P 500: Relative Strength Pauses

According to Bank of America Global Research, Cincinnati Financial Corporation (CINF) is a US insurance carrier founded in 1950. The company primarily focuses on domestic property & casualty business via the independent agency channel. It offers coverage for standard commercial lines, personal lines, reinsurance, life insurance, and global specialty lines. Cincinnati actively writes business in 46 states, although its footprint is predominantly concentrated in the Midwest and Southeast.

The Ohio-based $19 billion market cap Insurance industry company within the Financials sector does not have positive trailing 12-month GAAP earnings and pays an above-market-average 2.5% dividend yield, according to The Wall Street Journal.

CINF trades a bit more expensively compared to its industry. With exposure to the stock market and issues upping some commercial insurance premiums, there are risks to the firm's profitability. Also, the company reported challenges with its Commercial Casualty lines due to inflation late last year.

Keep your eye on this one since CINF issued preliminary earnings back on January 27 when it announced higher fourth quarter 2022 catastrophe losses but also lower ex-catastrophe loss amounts. It reported EPS just a penny shy of estimates in early February, but the stock gained on a better-than-expected core loss ratio.

On valuation , analysts at BofA see earnings rising sharply this year and next before settling at a still-strong 10% growth rate in 2025. The Bloomberg consensus forecast is slightly less upbeat about the operating earnings outlook. Dividends, meanwhile, are seen as rising at a healthy clip over the coming quarters.

Still, the operating P/E is elevated, accounting for the high growth expectation. Trading 1.8 times book compared to the sector median of 1.22 is pricey. If we assign a 13 earnings multiple to $9 of earnings, that yields a $117 price objective. Overall, I see shares as about fairly valued considering the sustained earnings growth ahead. But valuation risks are to the upside should robust growth persist longer.

Cincinnati Financial: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q1 2023 earnings date of Thursday, April 27 AMC. Before that, shares trade ex-dividend on Thursday, March 16.

Corporate Event Risk Calendar

The Options Angle

Digging into the earnings report next month, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $1.48 which would be a 6% decline from $1.58 of per-share profits earned in the same quarter a year ago. The stock has a decent earnings beat rate history but has missed in two of the last three reports while shares have traded lower-post earnings in three of the past four reports. But the 4Q report after the preannouncement was met with big buying pressure.

For the upcoming Q1 report, traders are pricing in just a 4.1% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the release. That is about in line with previous reports and is inexpensive in my eyes considering the large recent earnings move. I would be a buyer of premium at that price.

CINF: Cheap Options Ahead of April Earnings

The Technical Take

CINF rose sharply from under $100 to above $130 around the earnings release, meeting an area of resistance in the mid to upper $120s. Support is in the low $110s which is also where the rising 50-day moving average comes into play. The longer-term 200-day moving average is flat near $108.

I would be a buyer of the stock under $120 with a stop under the January low, and a breakout above $130 would lead to a measured move price objective to near $145 - the April 2022 peak. Overall, it is a wait-and-see approach to see how the stock trades within this range.

CINF: Trading Range Developing

The Bottom Line

I am a hold on CINF. I see shares as near fair value given the valuation which shows a premium to the industry, but the company has strong earnings growth. The chart remains significantly below its high while some peers are near their all-time highs.

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