We closed this position on February 27, 2018. A copy of the associated Position Update report is here.
Like all of our Most Attractive Stocks the company has (1) high and rising economic profits (as distinct from accounting profits) and (2) a cheap valuation. As shown in our free report on TRV, the company’s return on invested capital (ROIC) (11%) is in the second quintile of all the companies we cover and its economic earnings are growing faster then reported accounting earnings. During its lat fiscal year, TRV’s economic earnings rose by $827mm while accounting earnings rose by only $673
At the same time, the stock’s valuation implies that TRV’s profits will decline by 30% and never grow again. In other words, the stock market is predicting a permanent decline of more than 30% in TRV’s profits. Given that most investors are not aware that the company’s operating profits are as strong as they are, the market is probably not giving TRV appropriate credit for its profitability.
In summary, the market is setting the profit growth bar quite low for this stock.
- About $29 million in non-operating expenses (after-tax) cause reported earnings to be understated.
- Our discounted cash flow analysis shows that TRV’s current valuation (stock price of $55.49) implies that the company’s profits will decline by 30% and never grow again.
- The company grew its economic earnings by $827mm during its last fiscal year.
For details on what causes the difference between economic versus accounting profits, see Appendix 3 on page 10 of our report on TRV. See Appendix 4 to learn how TRV increased net operating profit after tax (NOPAT) by cutting costs and increased its NOPAT margin from 11.7% to 14.8%. See Appendix 5 for details on how TRV grew invested capital while slower than revenue and also raised its invested capital turns from .72x to .74x. Appendix 7 (in the ROIC section) shows how the company’s increase in NOPAT margin and invested capital turns result in an increase in ROIC (from 8.4%% to 11.0%) and economic earnings, which rose by $827mm.
In summary, TRV is gets our “very attractive” stock rating because its economic earnings are strong and growing while its valuation implies economic earnings will decline permanently by 30%.
TRV fits the risk/reward profile of a great stock to buy.
Note: Stock pick of the week is updated every Tuesday.