BUSINESS
Erie Indemnity Company operates as a managing attorney-in-fact for the subscribers at the Erie Insurance Exchange in the United States. The company provides sales, underwriting, policy issuance, and renewal services for the policyholders on behalf of the Erie Insurance Exchange. It also offers sales related services, including agent compensation, and sales and advertising support services; and underwriting services comprise underwriting and policy processing; and other services consist of customer services and administrative support services, as well as information technology services. Erie Indemnity Company was incorporated in 1925 and is based in Erie, Pennsylvania.
INVESTMENT RATING
With future capital returns forecasted to exceed the cost of capital, ERIE is expected to continue to be a major Value Builder.
Erie Indemnity has a current Value Trend Rating of C (Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Erie Indemnity has a very low Appreciation Score of 14 but a very high Power Rating of 97, with the Neutral Value Trend Rating the result.
Erie Indemnity’s stock is selling significantly above targeted value. The current stock price of $354.38 compares to targeted value 12 months forward of $204.
Erie Indemnity’s very low appreciation potential results in an appreciation score of 14 (86% of the universe has greater appreciation potential.)
Erie Indemnity has a Power Rating of 97. (ERIE’s very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 3% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; the recent trend in ERIE’s earnings estimates has been favorable; and the Insurance Agents, Brokers & Service comparison group is currently in a modestly favorable position.
INVESTMENT PROFILE
ERIE’s financial strength is exceptional. Financial strength rating is 94.
Relative to the S&P 500 Composite, Erie Indemnity Co has moderate Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ERIE is extremely low risk. All factors are relative strengths. ERIE’s valuation is high: moderate dividend yield, high P/E ratio, and high price/book ratio. ERIE has low market capitalization.
CURRENT SIGNALS
Erie Indemnity’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.
Erie Indemnity’s current technical position is very strong. The stock price is in a 7.5 month up move. The stock has appreciated 75.1% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Erie Indemnity Co (NASDAQ: ERIE) has benefited from minimal positive changes in fundamentals: significant quarterly sales acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
For its fourth fiscal quarter (ending December 31), Erie Indemnity Co (NASDAQ: ERIE) has reported a 70% increase in E.P.S. from $1.25 a year ago to $2.12 in the current quarter. However, this performance was $-0.01 short of the consensus estimate of $2.13. E.P.S. were $8.53 for the latest four quarters through December 31 versus $5.71 for the same period a year ago — an increase of 49%.
Erie Indemnity Co (NASDAQ: ERIE) stock increased 1.4% on 2/26/24. The shares closed at $354.38. However, trading volume in this advance was below average at 76% of normal. The stock has been exceptionally strong relative to the market over the last nine months but is unchanged during the last week.
CASH FLOW
In 2022, Erie Indemnity experienced a very significant reduction in cash of -$55.7 million (-25%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$422.1 million. Non-operating sources contributed +$2.2 million (+1% of EBITDA). Cash taxes consumed -$63.8 million (-15% of EBITDA). Re-investment in the business amounted to -$127.8 million (-30% of EBITDA). On a net basis, debt investors received -$95.8 million (-23% of EBITDA) while equity investors pulled out -$192.6 million (-46% of EBITDA).
Erie Indemnity’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Erie Indemnity Peer Group. In most years, Erie Indemnity was in the top quartile. Currently, Erie Indemnity is above median at +1% of EBITDA (+$2.2 million).
Erie Indemnity’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Erie Indemnity Peer Group. (Since 2017 Cash Taxes, %EBITDA has decelerated.) In most years, Erie Indemnity was in the lower quartile and third quartile. Currently, Erie Indemnity is upper quartile at -15% of EBITDA (-$63.8 million).
Erie Indemnity’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Erie Indemnity Peer Group. In most years, Erie Indemnity was in the top quartile and lower quartile. Currently, Erie Indemnity is substantially below median at -30% of EBITDA (-$127.8 million).
Erie Indemnity’s Debt Investors, %EBITDA has experienced a minor downtrend over the period. This downtrend was accompanied by stability for the Erie Indemnity Peer Group. (Since 2017 Debt Investors, %EBITDA has accelerated sharply.) In most years, Erie Indemnity was in the third quartile and top quartile. Currently, Erie Indemnity is substantially below median at -23% of EBITDA (-$95.8 million).
Erie Indemnity’s Equity Investors, %EBITDA has suffered a strong overall downtrend over the period. This downtrend was accompanied by stability for the Erie Indemnity Peer Group. In most years, Erie Indemnity was in the top quartile and lower quartile. Currently, Erie Indemnity is slightly below median at -46% of EBITDA (-$192.6 million).
Erie Indemnity’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Erie Indemnity Peer Group. In most years, Erie Indemnity was in the top quartile and lower quartile. Currently, Erie Indemnity is lower quartile at -13% of EBITDA (-$55.7 million).
Erie Indemnity’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Erie Indemnity Peer Group. In most years, Erie Indemnity was in the top quartile. Currently, Erie Indemnity is above median at +6%.
PROFITABILITY
Erie Indemnity’s return on equity has been stable since 2013. The current level of 24.9% is 1.12X the low for the period and is -3.5% from the high.
Erie Indemnity’s very strong positive trend in pretax operating return significantly offset by a very strong negative trend in non-operating factors is a major performance consideration.
The productivity of Erie Indemnity’s assets rose over the full period 2013-2023: asset turnover has enjoyed a very strong overall uptrend.
Erie Indemnity’s pretax margin experienced a volatile overall downtrend over the period 2013-2023.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
Erie Indemnity’s return on equity is at median (24.9%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is at median (21.0%) reflecting asset turnover that is at median (1.32X) and at median pretax margin (16.0%).
Tax “keep” rate (income tax management) is at median (79.5%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is substantially below median (1.49X).
GROWTH RATES
There are no significant differences between Erie Indemnity’s longer term growth and growth in recent years.
Erie Indemnity’s historical income statement growth and balance sheet growth have diverged. Revenue growth has exceeded asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been -2.9% per year. (More recently it has been 9.8%.)
Total asset growth has been -13.3% per year. (More recently it has been 6.9%.)
Annual E.P.S. growth has been 9.7% per year.
Equity growth has been 9.1% per year.
No consensus growth rate forecast is available for Erie Indemnity.
Relative to the Erie Indemnity Peer Group, Erie Indemnity’s historical growth measures are erratic. E.P.S. growth (9.7%) has been above median. Equity growth (9.1%) has been above median. Revenue growth (-2.9%) has been lower quartile. Total asset growth (-13.3%) has been lower quartile.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Erie Indemnity’s stock price performance has been quite good. Between April, 2013 and February, 2024, Erie Indemnity’s stock price rose +345%; relative to the market, this was a +40% gain.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 44.2% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of 44.2% is at the upper quartile relative to Erie Indemnity Co Peer Group.
Current 5-year total return performance of 21.3% is upper quartile relative to the S&P 500 Composite.
Through January, 2024, with upper quartile current 5-year total return of 21.3% relative to S&P 500 Composite, Erie Indemnity’s total return performance is upper quartile relative to Erie Indemnity Co Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, ERIE’s overall valuation is quite high. Four of five factors are upper quartile. The highest factor is the ratio of enterprise value/assets, followed by the price/equity ratio, then by the price/earnings ratio, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor, ratio of enterprise value/revenue, is above median.
Relative to Erie Indemnity Peer Group, ERIE’s overall valuation is high. The highest factor, the price/equity ratio, is at the upper quartile. Ratio of enterprise value/assets is above median. Price/earnings ratio is near the upper quartile. Ratio of enterprise value/earnings before interest and taxes is at the upper quartile. The lowest factor, the ratio of enterprise value/revenue, is slightly above median.
Erie Indemnity has a minor value gap compared to the median. For ERIE to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 5.19X to 5.03X. If ERIE’s ratio of enterprise value/revenue were to fall to 5.03X, its stock price would be lower by $-11 to $343.
For ERIE to achieve upper quartile valuation relative to the Erie Indemnity Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 5.19X to 6.28X. If ERIE’s ratio of enterprise value/revenue were to rise to 6.28X, its stock price would increase by $75 from the current level of $354.
VALUE TARGETS
With future capital returns forecasted to exceed the cost of capital, ERIE is expected to continue to be a major Value Builder.
Erie Indemnity’s current Price Target of $194 represents a -45% change from the current price of $354.38.
Erie Indemnity’s very low appreciation potential results in an appreciation score of 14 (86% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 14, the high Power Rating of 97 results in an Value Trend Rating of C.
Erie Indemnity’s current Price Target is $194 (+89% from the 2022 Target of $103 but -45% from the 02/26/24 price of $354.38). This dramatic rise in the Target is the result of a +13% increase in the equity base and a +67% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a very large negative impact.
PTR’s return on equity forecast is 32.3% — substantially above our recent forecasts. Forecasted return on equity exhibited a slight, erratic decline between 2014 and 2022. The current forecast is above the 2019 peak of 28%.
PTR’s growth forecast is 14.0% — substantially above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2014 and 2022. The current forecast is significantly above the 2019 low of 0%.
PTR’s cost of equity forecast is 13.5% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2014 and 2022. The current forecast is above the 2015 low of 9.5%.
At Erie Indemnity’s current price of $354.38, investors are placing a positive value of $255 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 20.0% versus a cost of equity of 11.5%.
PTR’s 2024 Price Target of $194 is based on these forecasts and reflects an estimated value of existing assets of $122 and a value of future investments of $72.
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