Why It Was Easy to Predict Allstate’s Earnings Beat

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Last Wednesday, Allstate (ALL) reported third quarter earnings. The company beat on EPS and beat on revenue by more than a billion dollars. Here are the reasons investors should have seen this coming and can look forward to more strong performance form this stock:

  1. Good Companies offer a Track Record: History Tends to Repeat Itself

Allstate’s earnings beat should come as no surprise as the company continually outperforms the market’s expectations. In fact, it has come in with earnings beats every quarter this year. Allstate’s excellent management combined with its strong brand recognition have set the stage for the company to continue its recent successes as they move forward.

  1. Death, Taxes, and…Insurance?

Insurance remains a “must buy” item when consumers purchase homes, cars or most other big-ticket, durable goods. This constant demand for its product must not be overlooked when valuing Allstate’s business. Insurance premium revenue grew 5% year over year and total revenue increased nearly 6%. Since 2010, Allstate’s revenue has grown by 3% compounded annually. This quarter’s revenue growth indicates a pickup in growth relative to the long-term growth rate of the company.

  1.   Eliminate this Common Investing Mistake: Seek Profits, Not Just Revenue

While growing revenue is nice, it is even better when companies can turn that money into profits. Over the last four years, Allstate has grown its after-tax profits (NOPAT) by 45% compounded annually. This impressive growth rate has led the company’s return on invested capital (ROIC) to increase from 5% in 2010 to 14% last year. By focusing on NOPAT not EPS, we get a better view into the profitability of the business.

  1. Show Me the Money

Despite Allstate’s steady increase in profitability over the past several years, its stock remains undervalued. At its current price of ~$63/share, Allstate has a price to economic book value (PEBV) ratio of just 0.7. This ratio implies that the market expects Allstate’s NOPAT to permanently decline by 30%. We just highlighted that Allstate has grown NOPAT at a rate of 45% annually for the past four years. That growth has continued through the most recent earnings report as well. When market expectations are this low, investors have a chance to buy a great company that is also a great stock. Shouldn’t all investors be looking for companies that continue to grow while beating market expectations?

Allstate is just one of 20 stocks that make New Constructs’ Most Attractive Stocks List for October. This list showcases 20 of the stocks that are poised to outperform due to low valuations and excellent fundamentals.

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Kyle Guske II contributed to this report.

David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, style or theme.

Photo credit: Mike Mozart (Flickr)

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