Introduction
MetLife (NYSE:MET), the largest U.S. life insurer, announced a 68% profit increase for Q1 2015 on February 11th. Since then its share price has remained relatively stagnant ($1 increase). MET continues to trade at 80 cents on the dollar despite being a growing, undervalued company. The reason for this is regulatory uncertainty, the recent SIFI (systemically important financial institution) designation, and fear of low yield curves becoming the norm. We believe these fears are overblown, and that MET is a buy because it is extremely undervalued, there is institutional confidence in the company, and the recent uptrends in yields have already started to pump the stock up. For investors willing to wait for interest rates to come up (and they will eventually), MET is a clear buy. We’ll start this article with a quantitative breakdown of the company’s relative value, then analyze its growth profile, followed by an analysis on how the “smart money” is playing the stock, before concluding with some qualitative analysis and conclusions. Investors looking to learn more about our analysis style can do so here.
Valuation Breakdown
We take a quantitative approach to investing, preferring to focus our analysis on a certain set of metrics that have a strong predictive ability. We’ll start by analyzing MetLife’s value profile. This is important to look at as Nobel laureate Eugene Fama showed that “Value stocks (with low ratios of price-to-book value) have higher average returns than growth stocks (high price-to-book ratios)”. MET’s valuation profile is shown below:
Source
On every important measure of value, MET is attractively priced. Its sales yield (TTM Revenue / Market Cap) at 125% is essentially twice the average for the insurance group (62.6%), and nearly five times the financials sector average (24.6%). It also means that an investor can currently get $1.25 of revenue for every $1.00 they invest in a company that makes money and is rapidly growing (EPS growth of 172% this year.) This type of value is very hard to find in a profitable and growing company, especially in an otherwise expensive market.
