A Rarity: Acquisitions that Add Value; Beefed-up AmTrust Looks Attractive
When a company’s shares are trading at 52-week-high-levels, buying for future growth can be a bit dubious. So what should we make of property and casualty insurer AmTrust Financial Services (AFSI), which now trades around its 106-week high?
YCharts Pro marks the shares as attractive, backed by reasonable valuations and AmTrust's strong balance sheet. The company also lands on YCharts’ Growth At a Reasonable Price list for its great gains in revenues and returns on equity. A whole lot of financial analysts that track the company agree that the shares are attractive now. AmTrust gets strong or at least moderate “buy” ratings all around.
Much of the great optimism surrounding AmTrust comes from its surprisingly talented integration of several acquisitions. AmTrust has beaten analysts’ earnings estimates for each of the past six quarters, in large part because it keeps making more money from acquired assets than anyone thought possible.
Those acquisitions included investments in late 2009 and early 2010 for a large stake in the property and casualty insurance division of GMAC. The deal essentially gave AmTrust nearly 12,000 additional agents to sell its products, which the company credits for quick gains. By the end of 2010, AmTrust had already booked $25 million in pre-tax net income related to the deal. Such performance helped continue an already strong line of revenue and profit growth.
AmTrust operates in the relatively low-risk end of the insurance business by writing coverage in areas with somewhat predictable losses, high retention rates, low pricing pressure and low volatility. It sells U.S. workers’ compensation coverage to places like restaurants, doctors’ offices and light manufacturers. It sells property and auto insurance in niche areas, and warranty coverage on appliances and electronics. It also spreads sales across places like the U.K, Italy, France and Sweden as a way of limiting exposure to a single event. The model means that while AmTrust’s profit margins are sometimes lower than those of the major property and casualty insurers, they are more predictable.
AmTrust’s return on equity tends to beat them.
With proven management and recent growth, we could reasonably expect AmTrust’s share price to be a bit ramped. But at about 8.5 times earnings, AmTrust’s share price now is one of the lowest in the sector. Even at a 106-week high, it looks like these shares have further to go.
Filed under: Company Analysis