2023-09-14 11:15:56 ET
Summary
- There have been positive developments associated with some of the potential re-rating catalysts for Palomar Holdings.
- PLMR's stock is undervalued, and the company has the intention to engage in more share buybacks going forward.
- I stick to my existing Buy rating for Palomar Holdings, as there are catalysts that could support a re-rating of PLMR's share price and valuations.
Elevator Pitch
I maintain a Buy rating for Palomar Holdings' ( PLMR ) stock.
Earlier, my July 4, 2023 article was focused on the potential re-rating catalysts for Palomar Holdings.
With this latest write-up, I provide an update on some of the catalysts that were highlighted in my prior update in July.
Palomar Holdings upwardly revised its FY 2023 earnings guidance last month, which supports my bullish expectations of positive earnings growth momentum for PLMR. Separately, PLMR has continued to add to the ranks of its casualty insurance business, and this suggests that the company has confidence in this segment's growth outlook. Given that Palomar Holdings' shares are still cheap and there are positive developments relating to potential catalysts for the stock, I continue to assign a Buy rating to PLMR.
Positive Earnings Growth Momentum Evidenced By Upward Revision In Guidance
In my July article, I noted that "positive earnings surprises" could be a catalyst for PLMR.
The company's actual Q2 2023 normalized earnings per share or EPS of $0.86 beat the consensus bottom line estimate of $0.82 by +5.3%, and this was equivalent to a +17.8% YoY growth rate.
In early August, Palomar Holdings lifted the mid-point of the company's full-year fiscal 2023 normalized net profit guidance to $91 million . This is the second time that PLMR has revised its bottom line guidance upward. Palomar Holdings initially guided for the company to register adjusted core FY 2023 earnings of $88 million in mid-February 2023. The company subsequently increased its fiscal 2023 bottom line guidance to $90 million on May 30 this year.
At its Q2 2023 results briefing last month, PLMR emphasized that the updated full-year earnings guidance was a reflection of "what we expect to see in the first half or the second half of the year", and it stressed that "we feel like there’s great momentum in the business."
Five of the nine analysts, which have PLMR in their sell-side coverage universe, raised their FY 2023 bottom line forecasts in the past three months. But there is still room for Palomar Holdings to achieve earnings beats in the second half of this year. PLMR's fiscal 2023 earnings guidance of $91.0 million is still higher than the current sell-side consensus normalized net profit estimate of $83.9 million, according to data obtained from S&P Capital IQ .
Recent Hire Validates Casualty Business' Growth Potential
Another catalyst for PLMR which I mentioned in my July write-up is "the growth of its casualty insurance unit."
At the recent Barclays ( BCS ) Financial Services Conference on September 12, 2023, Palomar Holdings revealed that it is "growing rapidly in that (casualty insurance) market" and "seeing good submission flow." The company is hiring more people to support the growth of this particular business segment.
Last week, PLMR disclosed that it had appointed "Brian Pushic as Vice President, Casualty Underwriting, Head of Environmental." Brian Pushic has relevant industry experience, having served at CapSpecialty, Aon ( AON ) and AIG ( AIG ) previously. Palomar referred to this recent hire as part of its efforts to attract "best-in-class underwriters from household name insurers to build out a practice in new segments within casualty" at the Barclays conference this week. Prior to this, Palomar Holdings recruited relevant people to expand the company's presence in other areas within casualty insurance such as general casualty and excess liability.
PLMR's casualty insurance book expanded by +92% in Q2 2023 as mentioned in its August 2023 investor presentation , with professional liability insurance being the outperformer for the casualty business in this recent quarter. Looking ahead, it is fair to view Palomar Holdings' recruitment activity for the company's casualty insurance business as a leading indicator of this segment's future growth prospects.
Valuations And Share Buybacks
Palomar 's valuations are inexpensive, and the company appears to be keen on buying more of its own shares.
I estimate PLMR's Price-To-Earnings Growth or PEG ratio to be 0.84 times or below 1, as per the stock's consensus forward next twelve months' normalized P/E multiple of 14.2 times and the company's consensus FY 2023-2026 adjusted earnings CAGR of +16.9%. Also, Palomar Holdings' current 14.2 times P/E metric represents about half of its historical three-year mean P/E multiple of 28.1 times (source: S&P Capital IQ ).
It is clear that Palomar Holdings' shares are undervalued, and there is an opportunity for PLMR to execute on value-accretive share buybacks.
The company still has $50 million remaining from its current share repurchase authorization which expires at the end of March. The $50 million worth of potential share buybacks is significant, as it represents close to 4% of PLMR's market capitalization.
At its Q2 2023 earnings briefing, Palomar Holdings noted that "we will continue to use (share buybacks) opportunistically as we view our share price is undervalued."
Closing Thoughts
PLMR stock is undervalued in my opinion based on the PEG metric and historical P/E valuation comparisons. There is still a very good chance of key potential catalysts materializing for Palomar Holdings taking into consideration recent developments. As such, I maintain my Buy rating for Palomar Holdings.
For further details see:
Palomar Holdings: Positive Developments Relating To Key Catalysts