On Wednesday, Evercore ISI analysts made a positive adjustment to Allstate's stock (NYSE:ALL) stock, upgrading its rating from In-line to Outperform and increasing the price target to $226 from the prior $209.
The upgrade is based on the belief that the current valuation of Allstate, currently a $49.26 billion market cap company, does not reflect the potential for policy-in-force (PIF) growth and an expected increase in earnings per share (EPS) in the upcoming years. According to InvestingPro analysis, Allstate appears undervalued based on its Fair Value metrics, supporting the analysts' bullish stance.
The analysts highlighted a perceived valuation gap at a price-to-earnings (P/E) ratio of 10x, suggesting an impending turn in PIF growth possibly as early as the fourth quarter of 2024 but more likely in the first quarter of 2025. Current InvestingPro data shows a P/E ratio of 11.93x, with strong revenue growth of 11.67% in the last twelve months.
They anticipate a 4% upside to the consensus EPS, which should contribute to the stock's outperformance in approximately 2025. InvestingPro subscribers have access to 8 additional key valuation metrics and insights about Allstate's growth potential.
The upward revision of the price target to $226 is justified by applying a 10.5x multiple to the firm's 2026 EPS estimate. The analysts have increased their estimates for PIF growth after assessing the competitive landscape and observing an acceleration in website visits to Allstate in the fourth quarter of 2024.
They expect Allstate to experience marginal PIF growth in the fourth quarter of 2024, driven by higher advertisement spending and expansion into more states, coupled with typical seasonal improvements in retention, albeit at depressed levels.
Allstate's retention rates are expected to improve throughout 2025 as rate increases moderate. The analysts also foresee a possibility of further upside to retention in 2026, estimating a retention rate of 73% compared to 76% in 2022. However, they noted some uncertainty due to the mix of business from National General (Nat Gen) and direct channels, which may influence retention outcomes.
The forecasted 4% EPS upside is attributed to higher net investment income (NII) and improved auto underwriting, slightly offset by increased expenses related to advertising investments aimed at driving growth. The analysts pointed out that Allstate's continued rate increases should bolster margins in New Jersey and New York, contributing to a corporate auto combined ratio below 95% in approximately 2025.
Despite the positive outlook, risks to their thesis include potential underperformance in PIF growth, as Allstate has historically prioritized margins over growth. Nevertheless, the analysts believe that Allstate recognizes the need to demonstrate growth to facilitate a re-rating of the stock.
They also noted that retention deterioration has been influenced by Nat Gen, which experienced a decline in retention starting in the first quarter of 2024 and accelerating into the second quarter of 2024, prior to Allstate ceasing separate disclosures.
From a valuation perspective, the analysts argue that the risk-reward balance tilts favorably, with Allstate trading at a discount with a 10x next twelve months (NTM) P/E, compared to the 12-13x it traded at during the 2013-2015 period when it was growing PIF and had a less favorable mix of business.
InvestingPro analysis reveals the company maintains an impressive "GREAT" financial health score, has raised dividends for 14 consecutive years, and shows strong profitability metrics. For detailed insights into Allstate's comprehensive financial health and future prospects, access the full Pro Research Report, available exclusively to InvestingPro subscribers.
Jefferies also increased the insurer's price target to $267, while Keefe, Bruyette & Woods raised theirs from $222 to $225, both firms maintaining positive ratings. These adjustments reflect Allstate's robust third-quarter financial results, with revenues rising 14.7% year-over-year to $16.6 billion and a net income of $1.2 billion.
Allstate's Property-Liability business also demonstrated strong performance, with premiums rising by 11.6% to $13.7 billion. Furthermore, the company announced the sale of its Employer Voluntary Benefits business for $2 billion, expected to close in the first half of 2025 and projected to generate about $1.6 billion in capital.
Other notable developments include a rise in Allstate's investment income to $783 million, driven by higher fixed income yields, and a 23.1% year-over-year growth in the Protection Plans business revenue to $512 million.
These recent developments underscore Allstate's strategic efforts to strengthen its market position and enhance customer retention. The company's positive financial trajectory and potential for continued growth in the market are reflected in the updated price targets and ratings from Piper Sandler, Jefferies, and Keefe, Bruyette & Woods.
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