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Wall Street JournalArch Capital Rallies 35% YTD: How Should You Play the Stock?
Shares of Arch Capital Group Ltd. ACGL have rallied 34.7% year to date, compared with the industry’s increase of 33.8%, the Finance sector’s rise of 24% and the Zacks S&P 500 composite’s rise of 25.7%. With a market capitalization of $37.6 billion, the average volume of shares traded in the last three months was 1.9 million.
New business opportunities, rate improvement, growth in existing accounts and a solid capital position are driving this leading specialty P&C and mortgage insurer.
ACGL vs Industry, Sector & S&P 500 YTD
Image Source: Zacks Investment Research
ACGL shares are trading well above the 50-day moving average, indicating a bullish trend.
Average Target Price for ACGL Suggests an Upside
Based on short-term price targets offered by 17 analysts, the Zacks average price target is $119 per share. The average suggests a potential 19.4% upside from Monday’s closing price.
Image Source: Zacks Investment Research
Southbound Estimate Revision
Two of the eight analysts covering the stock lowered estimates for the current year, while one lowered the same for the next year. The Zacks Consensus Estimate for Arch Capital’s 2024 and 2025 earnings has moved 1.4% and 24% south, respectively, in the past 30 days, reflecting analysts’ pessimism.
Favorable Return on Capital
Return on equity in the trailing 12 months was 18.9%, better than the industry average of 7.6%. This highlights the company’s efficiency in utilizing shareholders’ funds.
Also, the return on invested capital (ROIC) has been increasing over the last few quarters as the company raised its capital investment over the same time frame. This reflects ACGL’s efficiency in utilizing funds to generate income. ROIC in the trailing 12 months was 14.7%, better than the industry average of 5.8%.
Factors Favoring ACGL
Widespread operations coupled with a compelling product portfolio provide meaningful diversification and earnings stability to ACGL. These also enable international expansion, enhance operations and diversify business at attractive risk-adjusted returns through strategic buyouts.
Its Mortgage Insurance complements the specialty insurance and reinsurance businesses. ACGL’s buyout of Allianz’s U.S. MidCorp and Entertainment insurance business has expanded its footprint in the middle-market property and casualty segment.
A growing base of invested assets driven by improving cash flows should drive investment income.
Sufficient liquidity coupled with low leverage has helped ACGL strengthen its balance. It also shields it from market volatility and supports growth initiatives.
Notably, its free cash flow conversion has remained more than 85% over the last many quarters, reflecting its solid earnings.
Optimistic Growth Projection
The Zacks Consensus Estimate for 2024 earnings is pegged at $8.99 per share, suggesting an increase of 6.4% on 20.9% higher revenues of $16.3 billion. The consensus estimate for 2025 earnings per share is $9.11, suggesting an increase of 1.3% on 14.1% higher revenues of $18.6 billion.
The long-term earnings growth rate is projected to be 7%. We expect the 2026 bottom line to witness a three-year CAGR of 4.2%.
Arch Capital Trading at a Premium to Industry
ACGL shares are trading at a price-to-book multiple of 1.8, higher than the industry average of 1.6.
The company has a Value Score of A.
Image Source: Zacks Investment Research
It is attractively valued compared with Fidelity National Financial, Inc. FNF and W.R. Berkley Corporation WRB but is expensive compared to CNA Financial CNA.
Parting Thoughts
Arch Capital boasts a strong product portfolio and has a solid track record of premium growth. Both the Insurance and Reinsurance segments should continue to witness significant growth from increases in most lines of business. A robust capital position over the years reflects its financial flexibility.
Given the premium valuation and negative analyst sentiment on the stock, it is better to stay cautious on the Zacks Rak #3 (Hold) stock.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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W.R. Berkley Corporation (WRB): Free Stock Analysis Report
CNA Financial Corporation (CNA): Free Stock Analysis Report
Fidelity National Financial, Inc. (FNF): Free Stock Analysis Report
Arch Capital Group Ltd. (ACGL): Free Stock Analysis Report