MetLife Inc. (MET) reported first quarter 2010 results on Apr. 30 with operating earnings of $834 million or $1.01 per share, which was significantly ahead of $131 million or $0.16 per share in the year-ago quarter. Results also modestly surpassed the Zacks Consensus Estimate by 4 cents per share, driven by robust growth witnessed across the U.S. and International business segments, higher premium income and variable annuity deposits as well as higher investment income.
However, following the earnings announcement, investors’ reactions on Wall Street have been quite tepid due to the caution raised regarding the completion and integration of the acquisition of American International Group Inc.’s (AIG) American Life Insurance Co. (ALICO) unit, along with internal cost and capital concerns related to it. Management of MetLife already expects its operating expenses to shoot up by as much as 50% in 2010.
Consequently, after rising 0.4% subsequent to the earnings release, the stock continues to tumble thereon to date. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Results
It’s always encouraging to outperform estimates. A quick look on the top-line reveals that while U.S. operations remained significantly strong — increasing dramatically by 325% year-over-year to $757 million — earned premiums improved 12% year-over-year to $6.9 billion and investment income grew 31% year-over-year to $4.3 billion.
However, operating earnings were hampered by several one-time charges along with Auto and Home segments, whose operating earnings declined 5% year-over-year to $72 million due to the current weak market conditions that led to high combined ratio. Also, MetLife Banking operating earnings were $53 million, down 31.2% from the year-ago quarter. Based on this result mix, total revenue for the reported quarter increased 17% year-over-year to $13.1 billion.
As of Mar 31, 2010, book value per share excluding AOCI increased substantially to $42.67 compared to $37.54 as of Dec 31, 2009. Reported book value (including AOCI) per share slipped marginally to $41.12 as of Mar 31, 2010, versus $41.23 as of Dec 31, 2009. As of Mar 31, 2010, operating cash flow was $484 million against a cash outflow of $1.16 billion as of Mar 31, 2009.
Earnings Estimate Revisions – Overview
Estimates have witnessed marginal movement for MetLife since the earnings release. This aptly reflects that the analysts’ opinion does not coincide with the management’s vision of promising near-term growth. This, anyway, provides a realistic view of the present scenario. The earnings estimate details are more deeply delved into below.
Agreement of Analysts
Analysts showed a mixed response to the earnings announcement, reflecting absence of any defined trend. Of the 18 analysts covering the stock, 7 raised their estimates for the upcoming quarter while 3 lowered theirs. For the following quarter, 5 analysts have upped their estimates while 4 lowered theirs over the last 30 days.
While analysts fail to agree on the outlook of MetLife for the two upcoming quarters, we find that they are quite optimistic about the company’s outlook for 2011. For full-year 2010, 7 analysts have raised their estimates while 5 lowered them. For full year 2011, 6 analysts have raised their estimates while no downward revisions were witnessed.
Magnitude of Estimate Revisions
Estimates have not budged for the next two quarters since the first quarter earnings announcement, indicating the lack of any near-term growth prospects. As well, for full year 2010, estimates have moved up only by a penny, rising from $4.24 per share to $4.25 per share. However, the moderate improvement projection in its operating performances in 2011 has led to a rise in 2011 estimates to $5.20 from $5.27 over the last 30 days.
Our Take
Although an improving equity market and better interest spreads have led to the desired growth, consumer sectors like Auto and Home continued to follow the weak trend on the backdrop of sluggish macro factors that led to weak demand. These factors have been persistently affecting the company’s non-insurance operations, while the insurance operations get partially affected by the rising trend in benefits and claims that continue to pressure the bottom line.
The pending ALICO acquisition is expected to close by the end of 2010 and projected to be immediately accretive to earnings, although related debt costs could pressurize the bottom-line for some time. Moreover, concerns have also appeared over the firm’s completion and integration of ALICO in due course of time. Nevertheless, MetLife’s liquidity remains sustainable with persistent growth in book value per share.
Overall, we believe that improvement will be achieved in 2010 helped by cost cuts, improved investment returns and higher revenue, although a return to historical growth levels is not expected until at least 2011. Also, the ALICO acquisition is expected to boost results though debt costs related to the acquisition may cause worry for some time.
MetLife has a secured exposure to future investment losses that is supported by its statutory capital and a modest upside in the operating earnings’ projection. Hence, we believe that MetLife is poised to propel its growth as the economy rebounds in the near to medium term.
Given the mixed factors in the current sluggish economic condition, there is no clear directional pressure on the shares over the near term. This is reflected in the Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock also remains at Neutral.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “MET”
Read the full analyst report on “AIG”
Zacks Investment Research
