Joe Costigan, Director of Equity Research at Bryn Mawr Trust Company, says Walgreen Company (WAG) is performing in an area with secular growth that’s been the result of three factors.
“First, America is aging, and as people age they tend to consume more health care. Second, health care in general has moved over the last 10 years or has incorporated more lifestyle or patient-optional medications; and lastly, there has been a consolidation in retail pharmacy,” Costigan said.
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As smaller players find it harder to compete, Costigan says that retailers such as Walgreens are able to grow at others’ expense. He also adds that while his firm was initially invested in CVS Caremark Corporation (CVS), it found that Walgreens had a much more attractive valuation.
“We looked at Walgreens three years ago when we actually owned CVS, and we realized that the valuation of Walgreens was significantly more attractive than CVS, so we bought Walgreens. It’s been one of our better performers, in part because of the secular demographic trends but also in large part because of our valuation work,” Costigan said.
Joe Costigan, Director of Equity Research at Bryn Mawr Trust Company, says his firm looks to invest in businesses that have consistently performed well over time, and that Bed Bath & Beyond Inc. (BBBY) is one of those.
“We like Bed Bath & Beyond because they are conservatively financed; most of their assets are in form of inventory; they mitigate balance sheet risk by leasing their stores; and they have demonstrated an ability to put competitors out of business,” Costigan said.
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While is firm is generally wary of brick-and-mortar retailers, Costigan believes the trend toward online retailing will take years, and while that plays out, strong competitors like Bed Bath & Beyond will see continued success.
“Bed Bath & Beyond will be able maintain market share and their cash flow,” Costigan said. “Consequently we view BBBY as a business that is both conservatively financed and has a demonstrated ability to grow.”
Edwin D. Miska, Director of Equities at First Investors Corporation, says Nu Skin Enterprises, Inc. (NUS) was once of his top performers last year. He touts the company’s success with innovative health products and believes it will be a great growth story.
“They have a line of vitamins and supplements, and they’ve also been getting involved in the beauty and anti-aging area. So they’ve been benefiting from a ‘vanity doesn’t go out of style’ theme via a direct selling model, and Nu Skin has tapped into that quite well,” Miska said.
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Despite a hiccup in China which resulted in Nu Skin’s stock price dropping significantly, Miska still sees strong growth potential for the company.
“They may have grown too quickly, and the Chinese regulators investigated the company,” Miska said. “The regulators asked for improved training and assurances that the sales people are communicating their message within the guidelines that the Chinese government has outlined.”
“We still feel that Nu Skin has a tremendous growth story, and they have a new weight-management product, which they will be rolling out globally, and so we feel that they should be able to put up very good solid growth,” Miska added.
Portfolio Manager Ric Dillon of Diamond Hill Capital Management says that his firm bought and sold Staples, Inc. (SPLS) due to less-than-expected earnings and revenues resulting from Amazon’s (AMZN) gains and the outcome of Office Depot (ODP) and OfficeMax’s consolidation.
“Staples’ market of course is undergoing a lot of change like a lot of retailing is. Competition from online services like Amazon, in particular, have led to some consolidation, and the number-two and number-three players in the market, Office Depot and OfficeMax have merged,” Dillon said.
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Dillon says his firm underestimated how much market share the Amazon online business was taking, as well as the time it has taken for the rationalization of Office Depot and OfficeMax, which negatively affected Staples.
“The merger took a little longer to occur, and [Office Depot] just recently announced 400 store closures, so Staples has been a little disappointing,” Dillon said. “They had earnings less than we expected and revenues less than we expected, primarily because they were not getting the market share gains from Office Depot, OfficeMax that we expected.”
Meyer Shields, Analyst with Stifel, Nicolaus & Co., says Brown & Brown, Inc. (BRO) has had challenges lately with organic growth and margin expansion. He says much of the company’s quarterly lumpiness is a result of new seasonality from Brown & Brown’s acquisition of Beecher Carlson.
“There was an expectation in the first quarter of this year that margins would be more impressive, and that hasn’t happened,” Shields says. “Not so much because things aren’t working the way management was trying, but because there is a seasonality that’s relatively new to Brown & Brown, and as that seasonality demonstrates its positive nuance, in other words in the second quarter where you get disproportionate amounts of revenues, but again the same expense rate, it should see more margin expansion.”
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Shields also is positive about Brown & Brown because the benefits of economic recovery are supporting revenue growth through insurance brokers. And, he says the current environment is a good one for brokers to make acquisitions.
“We have seen a number of eight- or nine-digit revenue brokers that have been sold recently instead of seeing themselves as an appropriate starting point to be an acquirer, and Brown & Brown, among others, has benefited from the availability of a lot of these large properties in addition to I think the availability of many, many small books,” Shields says.
Stephens Inc. Analyst John Campbell says he believes Willis Group Holdings PLC’s (WSH) new CEO, Dominic Casserley, is taking the company in a positive direction.
“They have got several internal initiatives going on right now focused on cost reduction, looking at redundancies, just looking at further efficiencies,” Campbell says. “In addition, Willis has several ongoing re-orgs and that’s one of the main things that Dominic is providing for the company, and I think he is giving them a fresh look…I think he can take a 10,000-foot view of the company, look at the operations, find inefficiencies, help to eliminate those.”
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Campbell says Casserley also has rolled out shareholder-friendly initiatives, and the company’s dividend is up to about 3% yield. And, Campbell says Willis Group, under Casserley’s leadership, has its eye set on the acquisition of French broker Gras Savoye.
“The beauty of the Gras Savoye buyout is that it is strictly an option to them, and they have the luxury of waiting to see how the economies in Gras Savoye’s key markets improve over the next year before deciding to act,” Campbell says. “Willis has a healthy balance sheet as it stands, so they certainly have the ability to take this down if they so choose.”
Macquarie Group Analyst Amit Kumar says he thinks American International Group Inc (AIG) is one of the best values is the insurance sector. He says AIG has downside protection because of a number of factors working in the company’s favor.
“Number one is their mix of business between P&C and life,” Kumar says. “The underlying trends in AIG’s P&C book have been stabilizing, and AIG’s life and retirement business continues to make strong contributions to earnings, which recently have been more than the P&C.”
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Kumar says that as AIG continues to turn around and fix old legacy issues, its ROEs will continue to go up. And, he says AIG’s return to capital management is also working in the company’s favor.
“We saw that they announced a new share repurchase program and also reinstituted a quarterly dividend last summer, both of which they have since increased,” Kumar says. “My sense is that the recently closed sale of ILFC also gives the company additional excess capital, and that could be put to use in terms of buying back their stock.”
Randy Binner, Managing Director at FBR Capital Markets, says MetLife Inc (MET) ramped up its variable annuity sales significantly right after the financial crisis. But, he says that given the transition to the lower interest rate environment, among other factors, MetLife made a decision to shift strategic direction.
“MET is going in a direction of being more international and less interest rate exposed, and so VA was not consistent with that,” Binner says. “A combination of those factors led MET to pull back on VA sales.”
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Binner says he thinks MetLife’s variable annuity sales will stabilize at current levels. He says that will create opportunities for other companies in the space.
“That should still provide the ability for AIG and Lincoln to gain share, because the overall demand for VAs from Baby Boomers will continue to increase,” Binner says.
Alain Karaoglan, Executive Vice President and COO of Voya Financial Inc (VOYA), says the company has set aggressive targets to improve its return on equity. He says management is working to achieve 100 to 110 basis points annually.
“We have outlined 30-plus specific initiatives to improve our return on equity, and what I can tell you is — fortunately or unfortunately — there is no one silver bullet. Every one of our businesses has to improve its return on equity,” Karaoglan says. “To guide us, we have three financial metrics that are very critical and drive what we do: risk-adjusted returns; distributable earnings, which is essentially free cash flow that you can generate; and then sales at or above our internal rates of return.”
Karaoglan says each of Voya’s business segments — retirement solutions, investment management and insurance solutions — will each follow different paths to ROE improvement. But, he says overall the company is on track to achieve its target of 13% return on equity.
“So far in 2013 and the first quarter of 2014, we’re ahead of that, so we’re encouraged by that, but we need to continue on that path,” Karaoglan says. “Improving our performance is a key part of our vision to be America’s Retirement Company and to fulfill our mission of providing a secure financial future — one individual, one family, one institution at a time.”
Rick Williams, Chairman and Co-CEO of Primerica, Inc. (PRI), says the company’s sales force was up to about 95,400 representatives in the first quarter. He says that represents a 5% increase year over year.
“We’ve been growing. Recruiting was up 4%,” Williams says. “The number of new representatives that we licensed was also up 4%. So we are having success in doing so.”
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Williams says the growth in Primerica’s sales force is related to initiatives that were introduced in 2012. He says the company introduced a new compensation system that is oriented to helping representatives get licensed and become more productive earlier in their careers.
“We also are focused on sales force incentive programs,” Williams says. “Our business is very much incentive-driven, where in order to qualify for trips and other incentives, getting people licensed and productive is a core component.”
