The Company: Allstate Corporation (ALL) is a large cap insurance company that was founded in 1931. The auto portion of the company is the second largest in the US and the home insurance portion of the company is the fourth largest. According to a handful of insurance ratings, the company holds high rankings, which highlights their customer satisfaction. Since the early 2000s Allstate has promoted the “Are you in good hands?” slogan, which is known by almost everyone in the US.
Advantages: Although the underwriting business is challenging, it can produce consistent revenues year after year if you’re able to satisfy customers and continue to improve that aspect of the business. Recently, they sold off their life insurance portion to Blackstone. Some many see this as a downfall, but I see it as management whiling to make hard decisions so that they can improve on what they are good at, auto and home insurance. They aren’t the largest insurance company in either auto or home, but that means they have room to grow which is a nice problem to have when you are wanting a company to grow. The two types of insurance they chose to focus on are types that most US citizens need to have. To drive a car, you must have car insurance. When it comes to home insurance, it’s not a good move to not have insurance, and most lenders require you to when getting a loan. As time goes on more people are acquiring homes and cars which should increase customers. Because of these reasons, one can expect consistent revenue in the future if they keep customers happy.
Disadvantages: The future state of auto insurance is their biggest concern. Some would say that insurance for self-driving cars could be cheaper, or non-existent. I wouldn’t go as far to say that we would not have insurance. For one it is the law, and for two, even if self-driving cars are nearly perfect, there is still a need to insure your car for many other reasons such as natural disasters, road wear, personal legal reasons, etc. However, these concerns would be many years down the road. The amount of companies in this sector means that there is plenty of competition. I like the competition; it’ll force the company to continuously get better. If they don’t, it could be bad, but it would take a while for that to trickle to the revenue in a meaningful way. Insurance companies are responsible for their customers. This means if natural disasters occur, it can quickly drain their cash. The underwriting business is challenging, little decisions can make a significant impact. Good or bad.
Valuation and current state: Allstate is considered a value play from my perspective. The P/E, P/B, P/S, P/CF, and enterprise multiple are 6.38, 1.18, 0.78, 6.51 and 5.89, respectively. Looking at these valuation measures they are attractive, especially considering they are all lower than the five year averages. The dividend has been constantly growing over the past five years, and with the payout ratio being lower than 15%, they will have no trouble paying it to shareholders. With a debt/cash ratio ~1, and the debt/EBITDA >1, the debt is not a stress to the company. Doing a DCF I can get the company undervalued and should expect nice returns if the FCF keeps up. At its current price, it’s attractive.
Final thoughts: Allstate isn’t the attractive tech company that has been getting a lot of attention as of recently, which could be a reason it’s undervalued. I like how the revenue will be relatively stable due to there products being something customers need to have. I found it impressive that even in 2020 the company was able to turn a profit. Many people were not driving and decreased the amount of coverage to take coverage off altogether. This shows that Allstate excels at underwriting. I like this pick and am considering taking a position.
Links:
https://www.morningstar.com/stocks/xnys/all/valuation
https://finance.yahoo.com/quote/ALL/key-statistics?p=ALL
https://www.allstate.com
https://www.insurancejournal.com/news/national/2020/02/10/558054.htm
https://www.nerdwallet.com/blog/insurance/top-home-insurance-companies/
https://www.valuepenguin.com/largest-auto-insurance-companies
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