David Peltier
The sales decline came as price competition in the California market hurt insurance premiums. A state-run insurance fund owns about half the market in that state, while Zenith is one of the largest private-sector firms that competes for the remainder of the worker's compensation business in the nation's largest state.
Rather than selling more insurance plans at lower prices, management opted to wait for a better pricing environment than lock itself in at lower rates and yet Zenith still posted much better than expected second-quarter earnings. At current levels, Zenith is valued at just 6.4 times expected full-year profit of $6.48 a share. While that is well below the historical average, the company's 1.5 price-to-book ratio is more in line with its peer group, according to Bloomberg. This is a measure of the value of a company's shareholder equity, which is the most common price metric used in the insurance business. Still, I believe that readers should take notice of Zenith's 4.1% dividend
yield, which is more than two percentage points above the payout of the average S&P 500 stock. The company's dividend can be comfortably covered with 26% of expected 2007 earnings. Investors at the close of trading July 24 qualified for the upcoming Aug. 14 payment of 42 cents a share.
Zenith is downright cheap at current levels, and I believe that readers should follow the insiders and consider buying the stock. The company operates in a lucrative niche of the insurance market, one that most of the larger names in the business have ignored, making it a potential takeover target. In the meantime, I believe the pricing issues in California should improve by the end of the year and that the shares can trade back up toward $50.
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