Wednesday, May 8, 2019

A Current AIM Small Cap Equity Holding: Universal Insurance (UVE, $30.00): “Should You Hold Universal Holdings” By: James F. Oddo, AIM Student at Marquette University


Universal Insurance (UVE, $30.00): “Should You Hold Universal Holdings”
By: James F. Oddo, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary:

Universal Insurance Holdings (NYSE:UVE) Universal Insurance Holdings, Inc. (UVE) is a private personal residential homeowners insurance company in Florida. The Company performs substantially all aspects of insurance underwriting, policy issuance, general administration, and claims processing and settlement internally.

• For UVE, a total of $84 million in income statement and balance sheet adjustments to convert accounting earnings to economic earnings in FY18.

• On April 5th, 2019, UVE entered the oversold territory with an RSI reading of 28.9, for comparison, the RSI reading for the S&P500 was 68.6.

• Historically, UVE has demonstrated strong returns of 23%, surpassing the industry average of 8%. With a debt to equity ratio of 23%, UVE’s debt level is acceptable. UVE’s capital structure has a good balance of financial flexibility.

• Key fundamentals and ratios outlined below may make an investor speculative toward investing in Universal Insurance.

Key points:

Universal Insurance has taken quite a hit this quarter, falling 20%, in contrast to small cap insurance performing admirable this quarter. The market prospect for UVE is pessimistic with an earning reduction of -8.6% UVE has a market cap of $1.0b and 34.9m shares outstanding. Trading volume is at 289,000, when the average has hectically been at 276,000. This points towards a poor trading liquidity. A calculated 200 day moving average is 39.77 and a 50 day moving average of 33.41. UVE is trading -25.20% below its 200 day moving average. Last year’s EPS was reported at 3.27 and a PE of 9.10. The dividend yield is at 2.15% with a dividend per share of .64. This can result in the company being undervalued.

Looking at UVE’s EPS long term growth rate and persistence, there are some red flags. UVE’s estimated inflation adjusted EPS growth rate is an 8.06% which is below the comfortable growth rate of 15%. UVE has also seen sporadic EPS quarterly earnings for the most recent 8 quarters, resulting in another skepticism for longing Universal Holdings. Two quarters in a row, UVE has underperformed the market exception for earnings.

Universal Holdings did see some growth according to their 2019 Q1 earnings call: Total revenue was up 23.5%, premiums up 7.1%, return on equity was 30.4%, BV per share grew at 17.2%, and their pre-tax income margin was an impressive 22.7%. Despite all the underlying issues last year, these numbers do have some promise to them.

What has the stock done lately?

Over the past 30 days, UVE has fallen -5.07% and over the past 3 months, -21.31%. UVE’s 2019 Q1 earning was $1.00, which is below the market expectation of $1.06.

Past Year Performance:

For the 52 weeks ending 4/5/2019, the stock of this company was unchanged, at $31.04. The Price / Earnings ratio is 9.49. Earnings per share rose 3.8% in 2018 from 2017. This company is currently trading at 1.31 times sales. The three companies vary greatly in terms of price to sales ratio: trading from 0.49 times all the way up to 3.91 times their annual sales. Universal Insurance Holdings, Inc. is trading at 2.15 times book value.

Source: FactSet

My Takeaway:

Universal Holdings, Inc. has seen some serious issues with their fundamentals recently, but has also posted some impressive growth numbers. It is tough to say exactly where UVE should sit on a rating scale, but I still am very skeptical about the company’s value. For now, I will rate UVE at a hold, with a very close eye on the fundamentals. My biggest fear is the staggering price to book value of 2.1. Financial firms are strongly valued on their PB value in relation to their competitors. The industry average sits around 1.5-1.6. I would say to be cautious with this valuation and keep your eye on Book Value.

Source: FactSet

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