NEW YORK (TheStreet) – Dai-ichi Life Insurance's $5.7 billion acquisition of Protective Life (PL) in June not only represents a 37% premium from where the Alabama-based life insurer was trading a month before the deal, but shows the potential value in other U.S. insurance companies.
The deal values Protective Life at a price-to-earnings ratio of 13.04x (2015 estimates), price-to-sales ratio of 1.36x and price-to-book ratio of 1.28x. This compares with the $13.9 billion market cap of Lincoln National (LNC - Get Report), which trades at a forward P/E ratio of 8.79x, P/S ratio of 1.14x and a P/B ratio of 0.97x.
Following an 86% rally in 2013, shares of Lincoln National, a life insurance and retirement services company, have underperformed against the broader market through the first seven months of the year (3.31% gain compared with the S&P 500's year-to-date gain of 7.03%). Lincoln as a whole may not be a potential target of Dai-ichi, given that Protective Life was the largest Japanese purchase of a U.S. insurance company, but segments of Lincoln could be attractive to other Japanese insurers as they struggle with a smaller market due to an aging population.
Wall Street remains bullish on Lincoln National, with an average analyst price target of $59 (11.7% above the current share price). Even at $59, the stock would still be trading under a forward P/E ratio of 10x with 8.7% earnings per share growth (9.9% this year) and 4.7% revenue growth (6.7% this year). In the three most recent analyst price target changes, Raymond James maintained its strong buy rating on 7/17 ($58 -> $63), Sterne Agee maintained its neutral rating on 7/17 ($58 -> $59), and Deutsche Bank maintained its buy rating on 7/14 ($56 -> $60).
Lincoln authorized up to a $1 billion share repurchase program in May and raised its quarterly dividend from $0.12 to $0.16 per share late last year (current dividend yield of 1.21%). The company expanded into auto insurance and this year added the Presidential Managed Risk Moderate Fund (which provides protection in volatility periods of the stock market), which will further diversify the business and be earnings accretive in the years to come.
Lincoln reported first-quarter EPS of $1.34 vs. the Wall Street consensus estimate of $1.29. This marked the fourth consecutive EPS beat, and the seventh of the last two years. Total revenue rose 11% year over year to $3.18 billion, with the annuity segment revenue climbing 17% to $909 million. Second-quarter earnings are due out after the bell on July 30.
Call Buyers Bet on a Strong Fall
On June 30, someone purchased 5,000 Oct $55 calls for $1.29-$1.39 each. The call-to-put ratio was 26:1. Call activity was nine times the average daily volume. On the same day, implied volatility rose 4.9% to 23.95. The open interest in these calls is nearly double that of the second-largest option (5,607 contracts, compared with the Jan 2015 $35 put's open interest of 2,871 contracts). The breakeven for the big buyer is $56.34, or 6.25% above the current share price, on October options expiration.
Bullish Setup on the Charts
Lincoln National Options Trade Idea
Buy the Oct $55 call for $1.50 or better
Stop loss- None
1st upside target- $3.00
2nd upside target- $4.00
At the time of publication, the author was long LNC, although positions may change at any time.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
Now let's look at TheStreet Ratings' take on some of these stocks.
TheStreet Ratings team rates LINCOLN NATIONAL CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate LINCOLN NATIONAL CORP (LNC) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, growth in earnings per share, increase in net income and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- LNC's revenue growth has slightly outpaced the industry average of 7.4%. Since the same quarter one year prior, revenues rose by 11.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Powered by its strong earnings growth of 40.69% and other important driving factors, this stock has surged by 28.46% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, LNC should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- LINCOLN NATIONAL CORP has improved earnings per share by 40.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, LINCOLN NATIONAL CORP increased its bottom line by earning $4.53 versus $4.46 in the prior year. This year, the market expects an improvement in earnings ($5.54 versus $4.53).
- The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Insurance industry average. The net income increased by 37.6% when compared to the same quarter one year prior, rising from $239.00 million to $329.00 million.
- Net operating cash flow has significantly increased by 204.78% to $263.00 million when compared to the same quarter last year. In addition, LINCOLN NATIONAL CORP has also vastly surpassed the industry average cash flow growth rate of -5.26%.
- You can view the full analysis from the report here: LNC Ratings Report