KNSL Stock Study (5-31-24)

Posted by Mark on July 6, 2024 at 08:34 | Last modified: June 2, 2024 14:06

I recently did a stock study on Kinsale Capital Group, Inc. (KNSL) with a closing price of $385.81.

M* writes:

     > Kinsale Capital Group Inc is an insurance holding company. The company
     > is engaged in offering property, casualty, and specialty insurance
     > products. It offers specialty insurance products for allied health,
     > healthcare, life sciences, a professional, and a public entity. The
     > company operates in only one reportable segment which is the Excess
     > and Surplus Lines Insurance segment, which includes commercial excess
     > and surplus lines liability and property insurance products through
     > its underwriting divisions. The company generates revenues in the
     > form of premiums and investment income.

Over the last 10 years, this large-size company has grown sales and EPS at annualized rates of 38.2% and 38.1%, respectively. Except for an EPS dip in ’17 and some added burst in ’23, this is a posterchild for “up, straight, and parallel.”

Over the last decade, PTPM leads peer and industry averages while ranging from 18.2% in ’18 to 41.6% in ’15 with a last-5-year mean of 26.1%. ROE leads peer and industry averages by increasing from 12.4% in ’16 to 33.2% (’23) with a last-5-year mean of 22.9%. A lower Debt-to-Capital than peer and industry averages completes the trifecta ranging from 0% in 2016-18 to 22.9% in ’14 with a last-5-year mean of 10.4%.

Interest Coverage is 43.5 and Value Line gives a “B++” rating for Financial Strength.

With regard to sales growth:

• YF projects YOY 25.4% and 20.3% for ’24 and ’25, respectively (based on 8 analysts).
• Zacks projects YOY 27.4% and 18.3% for ’24 and ’25, respectively (5 analysts).
• Value Line projects 15.5% annualized growth from ’23-’28.
• CFRA projects 27.6% YOY and 23.8% per year for ’24 and ’23-’25, respectively (7).
• M* offers a 2-year ACE of 22.7%.

I am forecasting below the range at 15.0% per year.

With regard to EPS growth:

• MarketWatch projects 21.6% and 21.4% per year for ’23-’25 and ’23-’26, respectively (based on 11 analysts).
• Nasdaq.com projects 20.0% YOY and 23.6% per year for ’25 and ’24-’26 [6, 6, and 3 analyst(s) for ’24, ’25, and ’26].
• YF projects YOY 18.0% and 18.5% for ’24 and ’25 (11) along with 5-year annualized growth of 15.0%.
• Zacks projects YOY 19.7% and 20.0% for ’24 and ’25, respectively (6).
• Value Line projects 10.1% annualized growth from ’23-’28.
• CFRA projects 5.8% YOY and 10.0% per year for ’24 and ’23-’25 (10), respectively.

My 7.0% forecast is below the long-term-estimate range (mean of two: 12.9%). Initial value is ’23 EPS of $13.22/share [not 2024 Q1 EPS of $15.05 (annualized)]: a leap of 92.2% YOY.

My Forecast High P/E is 30.0. Since 2016, high P/E ranges from 28.2 in ’16 to 48.7 in ’22 (excluding 65.3 in COVID year of ’20) with a last-5-year mean of 39.6 and a last-5-year-mean average P/E of 30.6. I am forecasting near the bottom of the range (only ’16 is lower).

My Forecast Low P/E is 18.0. Since 2016, low P/E ranges from 14.5 in ’16 to 26.8 in ’18 with a last-5-year mean of 21.6. I am forecasting near the bottom of the range (only ’16 is lower).

My Low Stock Price Forecast (LSPF) is $301.70. The default $238 based on initial value given above seems unreasonably low being 38.3% less than the previous close. I am going with the 52-week low instead: 21.8% less.

Since dividend begins in 2016, Payout Ratio (PR) ranges from 4.2% in ’23 to 20.7% in ’17 with a last-5-year mean of 7.8%. I am forecasting below the range at 4.0%.

These inputs land KNSL in the HOLD zone with a U/D ratio of 1.2. Total Annualized Return (TAR) is 7.7%.

PAR (using Forecast Average—not High—P/E) of 3.1% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead (still less than I like to see for a medium-size company).

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 190 studies done in the past 90 days (my study and 79 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 19.3%, 15.5%, 34.8, 21.3, and 7.8%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 30.0 that is greater than MS (28.1) and greater than mine (24.0).

MS high / low EPS are $29.14 / $13.22 versus my $18.54 / $13.22 (per share). My high EPS is less due to a much lower growth rate. Value Line’s high EPS of $20.25 is in the middle.

MS LSPF of $284.80 implies a Forecast Low P/E of 21.5 versus the above-stated 21.3. MS LSPF is 1.1% greater than the default $13.22/share * 21.3 = $281.59, which results in more aggressive zoning. MS LSPF is 5.6% less than mine, however.

TAR (over 15.0% preferred) is much less than MS 18.6%. MOS is robust in the current study. Given only two long-term analyst estimates available, I have applied a larger growth-rate haircut toto account for potential bias/uncertainty. I am using the lofty recent-year EPS that may or may not be an anomaly, though.

With regard to valuation, PEG is 3.4 per my projected P/E: quite expensive. Relative Value [(current P/E) / 5-year-mean average P/E] is somewhat cheap at 0.84.

With the stock up ~28% in the past 12 months, I am not surprised to see it well extended right now.

KNSL is a BUY under $317/share. All else being equal, given my forecast high price ~$556 the stock needs to fall about 107 points to meet the BI TAR criterion.