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Jonathan Moreland
Jonathan Moreland
 

'Employers' Is Hired

Do you expect to be compensated by this worker' compensation insurer?

July 20, 2009
by Jonathan Moreland

[DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted.]

As CPA Insider™ readers know too well, the wall of worry about the market’s ability to keep surging is higher than ever — and the indices keep climbing. Even bulls who pounded the table about the bottom being in early March are voicing surprise at the rally’s longevity.

I’m surprised. It seems I took profits too soon in many of the positions I used to play and expected to end up being just another bear-market rally. While my tamed greed has still ended up giving the recommended list of my InsiderInsights Newsletter a solid 19 percent year-to-date return, I now find myself with a fairly high 25 percent cash cushion after my profit taking.

Time will tell if this cash will end up being smartly conservative as this aging rally finally takes a breather or a drag on performance as indices thumb their noses at pessimists. Either way, however, there are still several stocks I’m willing to buy into even after their recent appreciation. One of them is Employers Holdings (EIG:NYSE).

Employers specializes in providing workers' compensation insurance and services to small businesses in the U.S. The firm is well diversified in the types of businesses it covers, with the top ten industries representing just 35 percent of its total written premiums. Physicians’ offices and restaurants are the top two premium producers. They represent 6.8 percent and 6.5 percent of written premiums, respectively. Employers further mitigates risk by focusing on businesses with lower turnover and more experienced personnel. So fast-food restaurants tend not to be customers, while family-owned eateries are.

After aggregating state-run workers compensation programs under its corporate umbrella earlier this decade, Employers demutualized and came public via an initial public offering (IPO) in February 2007. It’s been downhill for the shares since then — weakness that followed the downturn in the U.S. economy itself.

Insiders began signaling value in these shares last November, however, when eight executives purchased 11,300 shares of EIG at an average price of $13.66. More recently, 10 insiders purchased another 25,250 shares at an average price of $10.42 so far in May.

Though hardly large in terms of aggregate dollar value, the two clusters of insider purchases at Employers did increase the holdings of the individual executives substantially each time. Shares of Employers also have the attraction of not being either over extended or over priced after the stock market’s months-long party. To the contrary, this stock still appears to be below most of your investor-client’s radar.

Reviewing Employers’ recent quarterly results and earnings estimates for this year, insiders have a good point with their value argument. In the midst of this horrendous recession, the firm was able to earn 43 cents per share in its first quarter. That was lower than the 51 cents per share earned in the prior year’s first quarter, but that’s to be expected given the large increase in unemployment over that same time. Negative earnings per share (EPS) comparisons will undoubtedly continue for the remainder of this year as well.

Still Earning at the Trough

More important to me, however, was that first quarter’s results put the firm in good shape to earn at least $1.39 per share in 2009 — which is the average of the large range of EPS estimates for Employers. EIG trades for just nine times that expectation. That’s low even for this low-multiple industry.

While present EPS estimates for 2010 aren’t promising much bottom-line growth at Employers, next year is arguably too far away to predict. But even a curmudgeon like me believes that 2009 will likely be the trough for this recession and my bet on Employers’ shares assumes that $1.39 per share also turns out to be the trough in earnings for the firm. If this scenario plays out, I would expect this stock to benefit from multiple expansions.

Larger peer Zenith National Insurance (ZNT:NYSE) has been able to maintain a multiple of 15 times the highest EPS estimate it has for this year. Not only is hitting the high-end of estimates unlikely for Zenith, but Employers has also managed better growth and profit margins as of late.

“Employers has also been more conservative than many peers when setting aside money for claims,” points out Robert Farnum, an analyst at Keefe, Bruyette & Woods (KBW:NYSE). “They tend to set aside more than the claim itself, which can lead to positive earnings contributions if final payment is below the reserve amount.”

And as poor as the timing of Employers’ IPO was for shareholders two years ago, the growth strategy that justified the firm going public finally looks set to play out. Employers acquired AmCOMP Incorporated late last year, a transaction that significantly diversified the geography of its policy exposure. If past is prologue and small businesses once again are at the forefront of job creation at the end of this recession, Employers’ newly widened base of operations and solid balance sheet should prompt and support respectable earnings growth.

Conclusion

Granted, unemployment is inevitably going to increase first in the near future. But Employers is managing the downturn well thus far, maintaining its A- rating from insurance rating firm A.M. Best and even executing the buyback of 1.6 million of its shares so far this year.

This all bodes well for employers’ shares when the economy finally levels off and I view the firm as a relatively low-risk way to play a 2010 economic recovery in the U.S.

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Jonathan Moreland is the Director of Research at New York-based InsiderInsights.com. View a FREE trial issue of the firm's weekly newsletter InsiderInsights. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Please note the stock recommendations in this column are solely the author’s and in no way represents the views of the AICPA or the CPA Insider™.