Wednesday, July 17, 2024

Tarnished Insurance Giant… or Undervalued Gem?

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Globe Life (NYSE: GL) has been a steady performer in the insurance industry for decades, but recent events have put this stalwart under the microscope.

A quick glance at the stock’s price chart should give you an idea of what I mean. Following a disparaging report against the company’s sales practices earlier this year, shares tumbled sharply, and they are still in the process of rebounding from their multi-year lows.

Chart: Globe Life (NYSE: GL)

But despite the negative press, I think the stock deserves a serious look. Let’s run it through The Value Meter.

First, let’s look at Globe Life’s enterprise value-to-net asset value (EV/NAV) ratio, which gives us a sense of how the market is valuing the company’s assets relative to its peers’. Globe Life’s EV/NAV sits at 2.04, a significant discount to the market average of 6.56 for companies with positive net assets.

That’s not a bad discount. But is it truly a bargain?

The company’s ability to generate cash is crucial to answering that question, and Globe Life shows some strength in that regard.

Over the past four quarters, Globe Life’s free cash flow averaged 7.45% of its net assets. While this is slightly below the peer average of 8.04%, it’s not far off. More importantly, the company has churned out positive free cash flow in each of the last four quarters. That’s the kind of consistency value investors crave.

Globe Life’s first quarter results were quite solid. Net income rose 13.7% to over $254.2 million, up from $223.6 million a year ago. And net operating income hit $264.1 million, a 6.5% year-over-year increase.

The company also reported that the underwriting margin for its life insurance operations, which account for about 70% of its premium revenue, grew 6% year over year to $309 million in the first quarter. Underwriting margin for its health insurance segment, which makes up the other 30% of premium revenue, increased 3% to $93.8 million.

These numbers demonstrate Globe Life’s ability to profitably grow its core business.

But it’s not all rosy. The company is facing some headwinds.

A recent short-seller report and a Department of Justice inquiry into sales practices at its American Income Life division have put pressure on the stock.

Management has strongly refuted the short seller’s claims and is cooperating with the DOJ investigation. They’ve also hired an independent law firm to conduct a review of the allegations.

These issues create uncertainty, which the market hates. However, they also present an opportunity for investors who are willing to look past the short-term noise.

Globe Life’s business model has proven resilient over many decades. The company’s focus on serving middle-income Americans with basic protection life insurance and supplemental health products has consistently generated stable cash flows.

Moreover, Globe Life’s management seems confident in the company’s future. They’ve increased their 2024 earnings guidance to a range of $11.50 to $12.00 per share, representing about 10% growth at the midpoint. The company is also planning to repurchase $350 million to $370 million worth of shares this year, a sign that the insiders believe the stock is undervalued.

For patient investors willing to weather some potential volatility, Globe Life offers an interesting value proposition. The company’s strong market position in middle-income insurance, coupled with its consistent cash generation, provide a solid foundation. If Globe Life can navigate its current challenges and maintain its growth trajectory, today’s price could prove to be a bargain in hindsight.

The Value Meter rates this one “Slightly Undervalued.” However, the ongoing investigations and potential reputational damage warrant some caution.


What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.

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