Summary in seconds
I assign a Buy investment rating to The Allstate Corporation (New York Stock Exchange: ALL). ALL refers to itself as “the holding company of Allstate Insurance Company” which provides insurance services related to “autos, homes and personal property” according to its FY 2021 10-K filing.
Allstate’s first-quarter earnings fell short of consensus financial projections. But ALL’s auto insurance business showed QoQ improvement as evidenced by its combined ratio, while its home insurance business proved quite resilient against the threat of inflation. I rate Allstate as a buy because I find it to be undervalued with catalysts like auto insurance price increases.
Did Allstate beat its profits?
Allstate hasn’t beaten earnings for the first quarter of 2022, and that’s evident when looking at the stock price performance after ALL’s earnings announcement.
Based on the Company’s first quarter 2022 10-Q filing released after market close on May 4, 2022, ALL’s diluted earnings per share from continuing operations fell -71% from 7.78 $ in the first quarter of last year to $2.24 in the last quarterly reporting period. .
Allstate’s actual EPS for the first quarter of 2022 ended up being -24% lower than the Wall Street consensus financial estimate of $2.95. ALL pointed out on the company’s recent investor call after the earnings announcement that its core “auto insurance generated a slight underwriting loss” thanks to “the negative impact of inflation, which largely relates to motor insurance part”. The combined ratio for the Allstate brand’s automotive lineup fell from 80.0% in the first quarter of 2021 to 102.3% in the first quarter of 2022, according to its first-quarter earnings presentation. The auto business accounted for about 71% of Allstate’s underwriting revenue last year according to its 2021 10-K.
As such, it’s understandable that Allstate shares were down -2% from $133.68 on May 4, 2022 (earnings release) to $131.58 on May 5, 2022. last traded at $128.19 at the end of the trading day on May 15, and that implies ALL stocks are down around -4% since the Q1 2022 earnings release.
But ALL’s stock price performance could have been much worse without some positive measures that I will discuss in the next section.
ALL key stock metrics
Allstate shares have actually tracked the broader market closely over the past month, as shown in the chart below. Although ALL initially underperformed the S&P 500 following the announcement of its first quarter 2022 results on May 4, 2022, the stock eventually closed the gap between itself and the market index during the last week or so in terms of price performance. Some metrics disclosed alongside the first-quarter 2022 earnings release suggest Allstate hasn’t performed as badly as the lost profit would have implied.
One-Month Historical ALL Share Price Performance
A key indicator is the QoQ (Quarter-on-Quarter) improvement in ALL’s automotive combined ratio from 103.9% in Q4 2021 to 102.3% in Q1 2022. While the automotive combined ratio of ‘Allstate was still above 100% in the last quarter, the QoQ decline indicates that price changes had a positive impact.
Allstate noted during its first quarter 2022 earnings briefing that it “has turned to rate increases, which have increased significantly over the past six months” taking into account that “the inflation rose in the second and third quarters of last year”. ALL has set a goal of bringing the combined ratio of its automotive business into the mid-1990s percentage range by continuing to implement price increases to address inflationary pressures.
Another key metric is the combined ratio of Allstate’s home insurance business. Home insurance is ALL’s second-largest line of business, contributing about 18% of Allstate’s underwriting profit in 2021, as reported in its 10-K filing for fiscal 2021. Unlike to the motor insurance business, ALL’s home business line achieved a combined ratio of less than 100%, or more precisely 83.3%, in the first quarter of 2022.
Home insurance was a bright spot for Allstate in the first quarter of this year, as this line of business appeared to be relatively less affected by inflation than autos. During its first quarter earnings call, ALL explained that its home insurance products “have the sophisticated pricing features needed to address” inflationary cost pressures, which is attributable to the company’s efforts to restructure its ” residential activity over a period of several years”.
In summary, the market reacted negatively to Allstate’s lower-than-expected earnings. However, ALL’s stock price performance over the past two weeks has largely been in line with that of the stock index, and I believe this is due to the positive moves for Allstate that I discussed above.
What to expect after winnings
There are two things investors are looking for or expecting after Allstate’s first quarter 2022 results.
The first is the subsequent improvement in the combined ratio of ALL’s auto business (target percentage for the mid-1990s) as the company increases auto insurance prices over time to more than offset the rising costs due to inflation. This was mentioned in more detail in the previous section.
The second thing is that used vehicle prices may have already peaked. According to a CNBC on May 6 press articlethe “Manheim Used Vehicle Value Index, which tracks the prices of used vehicles sold at its U.S. wholesale auctions, fell 1%” MoM (month-over-month) in April 2022. Supply automotive has been limited during the worst of COVID-19 and the like, which has caused used vehicle prices to skyrocket and is unlikely to be sustainable going forward.
ALL mentioned at its previous Q4 2021 Investor Briefing on February 3, 2022 that “used car values started to increase in late 2020 and accelerated in mid-2021 with an overall increase of 68% from 2019. OEM parts and labor rates also accelerated in 2021” and noted that “severity, a significant majority on physical damage lines” is “determined by car prices.
As previously reported, the underwriting loss for the auto insurance business weighed on Allstate’s net income in the first quarter of 2022. To generate a profit for its auto business, Allstate must see insurance prices higher autos and lesser gravity, helped by lower vehicle prices, and that’s what investors expect after earnings.
What is Allstate’s long-term outlook?
Allstate’s long-term growth strategy is quite simple; this involves capturing a larger share of the market in which it operates and providing more services, as shown in the table below.
ALL’s growth strategy
ALL has been reasonably successful in executing its growth strategies, as evidenced by recent disclosures.
According to its fourth quarter 2021 earnings press release, Allstate increased its share of the auto insurance market by approximately +100 basis points inorganically through “the $4 billion acquisitions of National General and SafeAuto for $262 million in 2021.”
In addition, Allstate continues to expand its range of products and services. In its 2021 10-K exercise, ALL noted that it offers “protection solutions such as accident and health insurance, protection plans that cover consumer electronics, mobile phones.” At Raymond James Institutional Investor Conference on March 8, 2022, ALL revealed that it now has “an expanded product line, including (protective solutions for) appliances and furniture.” In the future, Allstate may extend its protection services to other product categories.
I’m positive about Allstate’s long-term outlook, as I like what I see from the company in terms of market share growth and the introduction of new services.
Do Allstate shares have a fair valuation?
Allstate is undervalued, and not currently valued at fair value.
ALL is currently valued by the market at 13.0 times the normalized P/E for the next twelve months according to the consensus S&P Capital IQ. By comparison, Allstate’s closest peer, The Progressive Corporation Inc (NYSE:PGR), is trading at a normalized P/E multiple of 21.0x consensus over the next twelve months, which equates to a premium by +62%.
PGR has always traded at a higher valuation multiple than ALL historically due to the former’s relatively higher ROE (according to S&P Capital IQ). But I consider the current valuation discount between the two to be too steep, and expect Allstate’s forward P/E multiple to rise as it progresses through its discussed growth plans. in the previous section.
Are ALL stocks a buy, sell or hold?
ALL stocks are a buy. Its valuations are undemanding and there are both short-term catalysts (e.g. increasing car insurance prices) and long-term growth drivers (e.g. introducing more protection services for different products ) in place for the title.