Ahead of Earnings, Hold StanCorp
StanCorp Financial Group, Inc. (SFG) intends to release its 1Q08 results after markets close on April 21, 2008, with a conference call scheduled for noon the next day. Fourth quarter '07 operating earnings of $1.23 per share were slightly higher by 0.8% year-over-year, attributable to the favorable impact of premium growth and claims experience and fewer weighted-average common shares outstanding year-over-year, but were offset by an increase in the benefit ratio. However, the price-to-book multiple remains substantially contracted from the 2.2x historic high.
If earnings growth continues to slow and ROE softens further, the potential for additional contraction is enhanced. Based on the results and guidance we are raising our FY08 and FY09 earnings expectations to $4.75 per share and $5.25 per share, respectively, from $4.60 per share and $5 per share.
At the current level, the shares of StanCorp Financial trade at 1.65x its 4Q07 book value of $28.73 per share (excluding AOCI). We continue to think there should be some pressure on the ROE and deceleration in book value growth in 2008, if the benefit ratio continues to deteriorate.
Consequently, we think the shares could potential trade down to in-line with the group if there is additional deterioration in the financial results. Our new six-month target price of $49.90 per share, up from $47.65 per share, incorporates a 1.65x price-to-book multiple (up from 1.50x previously) to our estimate of SFG's book value of $30.25 per share (excluding AOCI), as of June 30, 2008.
In addition, the quantitative Zacks Rank for SFG is currently 2 (up from rank 3 on January 30, 2008), indicating the potential for slight upward pressures on the shares over the near term. Short interest ratio is currently 2.2 days versus 1.8 days previously.
Equity Residential Benefiting
Overall, operations are good as Equity Residential (EQR) continues to increase rents while holding stable occupancy near 95%. Most of the company's core markets reported strong year-over-year revenue and net operating income (NOI) increases in the most recent quarter. The company continues to dispose of assets in lower growth areas to focus on higher barrier markets. In addition, EQR's large development pipeline should incrementally add to earnings as projects come on line.
We are concerned about a slowdown in rental rates due to unsold rental condos and houses flooding the market, especially in South Florida where the company has moderate exposure with nearly 10k units. Operationally, most multi-family owners continue to report good quarter over quarter results as rents are increasing in most markets.
Concessions are dropping, new construction is limited, and landlords have the ability to consistently increase rents. The 'for sale' housing market should continue to fall in 2008, which will benefit apartment landlords.
Equity had another strong quarter, and due to the move to fewer and better markets over the past couple of years, the company is now one of the better-positioned multi-family operators.
