One of the more common movie plots is a change of heart. The bad guy sees the error of his ways and becomes the hero.
A 180-degree change of heart is a favorite angle for insider buying. When a top executive uses their company stock as an ATM, cash out…cash out…cash out, and suddenly makes a deposit, investors’ heads should tilt in curiosity.
Employers Holdings, Inc.’s (EIG) head honcho, Douglas D. Dirks has sold more than 441,000 shares of the workers’ compensation insurance company’s stock since May 2014. The Chief Executive Officer (CEO) made 11 straight withdrawals for nearly $15 million. Dirks’ most recent sale was February 24, 2020 at $42.47 for $1.5 million. (1)
His change of heart came on May 1, 2020, breaking his selling streak and buying 19,000 shares at $29.42. His $558k buy stands out like a flashlight at night in county darkness. Dirks’ timing came close to the 52-week low of $26.68 and his February sell did not miss the 52-week high of $45.23 by much.
Talk about selling high and buying low!
If Wall Street is right, the CEO could turn his $558K into $950,000 as $50 is Wall Street’s consensus one-year price target. (2)
Let’s examine some of Employers Holdings’ valuations relative to its industry peers and its recent history to see if investors should consider following the CEO’s lead.
This year’s earning forecast has been slashed for EIG from $2.36 to $1.55 in the last three months. Analysts also lowered their view for 2021 to $1.56 from $2.48. We expect earnings per share (EPS) to be highly volatile for the remainder of the year. Companies should have a better sense of how to operate in 2021 and we expect EPS estimates to rise next year as current numbers are on the conservative end.
We feel investors might be better served looking beyond 2020 as an extended time horizon could make for better evaluations. As it stands now, EIG trades at a little more than 25 times 2021’s consensus earnings forecast. That is the company’s five-year high, forward price to earnings (P/E) multiple and considerably higher than 14.9 for the insurance peer group.
Forward P/E is the only common metric we see that’s out of line with the industry norms. In fact, Employers Holdings trades at a discount relative to its peers on a price to cashflow (P/CF), price to book value (P/B) and price to sales (P/S) basis.
As we type:
- EIG trades at 7.4 times it cashflow versus 8 for the industry.
- Trades at 0.78 times its book value compared to 1.8 for the industry.
- Trades at 1.12 times sales against 1.7 for the industry.
There appears to be some room for these multiples to move higher. In the past five years, the insurance company traded at an average of 1.32 times book value and 1.53 times its revenue.
Mr. Dirk would stand to make more than $313,000 if EIG returned to its average P/B ratio of 1.32 using the current book value of $34.78 per share. (3) That works out to a potential price target of $45.91. Looking forward, the street’s 2021 revenue consensus of $623.95 million and the five-year average P/S ratio of 1.53 brings home a less attractive price target of $31.43. (4)
Between the two measuring sticks we get a potential return range of 10.08% (P/S) to 60.80% (P/B) based on EIG’s current price of $28.55. A 3.38% dividend yield makes both ends more attractive provided the company continues to pay a $1.00 per share annual dividend.
Conclusion: Employers Holdings, Inc. (EIG) could be attractive to investors looking to add exposure to the insurance industry to their portfolios. However, based on current 2021 sales projections and its recent price to sales history, the stock could underperform in the next 12-to-18 months.
Douglas D. Dirks’ recent change of heart is encouraging. However, it is our opinion that EIG’s 2021 revenue will need to move up for the company to reach its price to book potential.
