Travelers: Shares Break Out To All-Time Highs, Still Reasonably Valued Ahead Of Earnings

Some of the best-performing stocks in the year are found in the lowly insurance industry. Not a sexy spot, the industry can produce steadier cash flows and even benefit from higher interest rates.

One large-cap, a Dow component with a 3.75% weight in the average, boasts a more than 20% total return YoY. But are shares attractively priced? And does the chart show exhaustion or more upside likely? Let’s investigate.

Travelers: Big 52-week Gains

According to Bank of America Global Research, The Travelers (NYSE:TRV) is a large, diversified property & casualty insurer deriving a mix of business from commercial and personal lines, particularly in the U.S., largely sourced through independent agents. Its commercial business tends to be tilted toward small business and middle market risks, while its personal lines business aims to sell bundled home/auto policies. The company has a long track record of returning to shareholders almost all the capital it generates through dividends and repurchases.

The New York-based $44.0 billion market cap Insurance industry company within the Financials sector trades at a below-market trailing 12-month GAAP price-to-earnings ratio of 14.2 and pays a 1.9% dividend yield, according to The Wall Street Journal.

The stock has been resilient following an earnings hit from losses related to Hurricane Ian during the heart of the tropical storm season. Moreover, TRV has been strong in the face of high inflation, like many insurance companies. Back in October TRV topped earnings expectations, helping to lift shares following a dip to $150 support in September.

On valuation, analysts at BofA see earnings having fallen more than 8% in 2022 but then recovering to a 10.5% growth rate in 2023. Even higher EPS growth is seen in 2024. The Bloomberg consensus forecast is a bit more sanguine in the next two years, too.

Dividends, meanwhile, are seen as rising with earnings as both TRV’s operating and GAAP P/Es settle into the low teens should the stock hold here. With strong profitability and momentum, I am more upbeat about the valuation compared to Seeking Alpha’s D- rating.

Travelers: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data from Wall Street Horizon show a confirmed Q4 2022 earnings date of Tuesday, January 24 BMO with a conference call later that morning. You can listen live here. The event calendar is light aside from the earnings date.

Corporate Event Calendar

The Options Angle

Digging into the upcoming Q4 report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $4.05 which would be a significant 22% decline in per-share profits compared to $5.20 earned in the same quarter a year ago. On the upside, though, TRV has topped analysts’ estimates in each of the past 10 quarterly reports, but shares have seen muted post-earnings moves in the –5% to +5% range.

Not surprisingly, the options market has priced in a small 3.1% earnings-related stock price swing using the at-the-money straddle expiring soonest after the January 24 reporting date. With implied volatility sub-20%, I would simply look to play the shares. Let’s see what the chart says on a directional bet.

TRV: Low Implied Volatility Around Upcoming Earnings

The Technical Take

TRV closed at a fresh all-time high on Friday. It’s rare to find 52-week highs let alone ATHs in this market, but the insurance industry features massive relative strength. After shares wavered above the $190 mark to finish off 2022, rising modestly above the March peak, a better thrust came last week following a good jobs report and a dovish ISM Services reading. I assert that a long position here with a stop under the December low of $181 is a favorable risk/reward play. $230 could be a measured move price target based on the March through December chart pattern.

Also notice in the chart below that the long-term 200-day moving average is upward-sloping (a positive sign), but the RSI could use some improvement to confirm the price breakout. Overall, though, this high relative strength stock appears poised for more upside.

TRV: Shares Breakout To All-Time Highs

The Bottom Line

Insurance stocks just keep working and remain attractively valued. I am bullish on TRV here and could see shares rising after earnings later this month.