On Aug 30, 2014, Zacks Investment Research downgraded
) by two notches to a Zacks Rank #5 (Strong Sell) from a Zacks Rank
Why the Downgrade?
Markelhas been facing downward estimate revisions owing to
sluggish underwriting experience and cash flows, which also led to
lower-than-expected second-quarter 2014 results and a slack outlook
for the next quarter. Additionally, this property-casualty insurer
delivered negative earnings surprises in three of the last four
quarters with an average miss of 12.1%.
On Aug 6, Markel reported second-quarter 2014 operating earnings
per share (EPS) of $2.66, which significantly lagged the Zacks
Consensus Estimate by 54.5%. However, EPS was higher than the
prior-year figure by 18.8%.
While higher premiums and investment income supported the
year-over-year top-line growth of 22%, net realized investment
gains tanked 38.3%. Moreover, operating expenses rose 22.7%, along
with an increase in interest and tax expenses. Additionally, a rise
in loss reserves and cost of acquisitions led to an operating cash
outflow of $243.5 million from against an inflow of $398.7 million
in the year-ago period, thereby limiting share buybacks.
Markel is focused on expansion through the recent acquisitions
of Alterra in May 2013 for about $3.3 billion, Abbey Protection Plc
in Jan 2014 for $190.7 million, Cottrell Inc. in Jul 2014 for $130
million as well as Tromp-Pol Baking Equipment BV (Vanderpol) and
Den Boer Baking Systems BV (Den Boer) in Aug 2014. However, these
acquisitions have weighed on the company's financial leverage (with
debt-to-capital ratio of 24% at Jun 2014-end) and cash flows.
Moreover, Markel faces the brunt of unfavorable reserve
developments, which continues to hurt underwriting results in the
property-casualty operations, which are already bracing
competition. Overall, weak fundamental growth prospects amid
significant underwriting and investment risks have failed to enlist
any positive investor sentiment for the upcoming quarter as
Meanwhile, the Zacks Consensus Estimate for 2014 and 2015
declined 18.3% and 8.6% to $19.16 and $23.09 per share,
respectively, in the last 30 days. There was no upward estimate
revision for both the years over the same time frame. Moreover, on
a year-over-year basis, earnings are expected to dip 0.2% in
Insurers That Warrant a Look
While we prefer to avoid Markelfor the time being, better-ranked
insurers such as Global Indemnity Plc (
), Mercury General Corp. (
) and Endurance Specialty Holdings Ltd. (
) are worth considering. All these stocks sport a Zacks Rank #1
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