Hold-Rated IPC Ests Upped
Fourth quarter '07 earnings were substantially ahead of our expectations, as a result of negative net losses and loss adjustment expenses for the quarter based on events that occurred in 2007. Since its inception in 1993, IPC Holdings, Ltd. (IPCR) has built a track record of strong underwriting results, while maintaining a strong balance sheet and average ROE in the mid-teens.
Presently, we think the company's current valuation is appropriate given the high volatility in its earnings stream based on its near mono-line business model and the negative outlook assigned by A.M. Best (thought we would point out that the financial ratings remained unchanged). We note that there continue to be a number of medium-severity catastrophic events around the globe, which could result in premium rates experiencing upward pressure locally in 2008.
At this time, we are maintaining our 2008 and 2009 earnings expectations at $4.70 per share and $5 per share, respectively. At the current price, IPC's shares trade at 6.1x our estimated 2008 EPS and 0.87x its book value of $32.42 per share as of March 31, 2007 (a discount to its peer group and at the low end of its 10-year historical range of 0.75, 1.52x). However, while the stock appears cheap at just 0.9x book value, we think the current price incorporates a modest acceleration of top-line growth next year along with risk of further outsized losses.
We note that the generous dividend yield (currently 3.1%) provides some downside cushion for total return. Our new six-month target price of $30.80 per share, up from $28.50 per share previously, incorporates a lower price-to-book multiple of 0.9x to our adjusted book value estimate of $34.25 per share at June 30, 2008. This translates to a total potential return of 10.6% over the next six-months. Our Hold rating on the shares of this company is justified, given our concerns for near-term overhangs for interest rates and what still appears to be an overbought equity market.
Oxford Industries Feels Headwinds
The current economic environment continues to negatively impact Oxford Industries' (OXM) businesses. This caused management to issue first quarter and fiscal year 2009 EPS guidance that was below market expectations as well as our estimates.
For the first quarter, Oxford expects net sales of $265-$270 million and diluted EPS of $0.55-$0.60. For the fiscal year, the company is projecting net sales of $1.01-$1.06 billion and diluted EPS of $2.35-$2.50. We maintain our Hold rating on the stock.
Its shares, which are trading at 9.6x our 2009 EPS estimate, appear to discount the company's weak business trends.
