UNLIKE OTHER FINANCIAL STOCKS , those of life-insurance companies have enjoyed a good run lately. Agile capital management and growing variable products have helped offset the compressed spreads of fixed annuity offerings, and first-quarter profits have been strong.
Rising stock prices will buy management time. But many companies are sitting on a growing wad of cash, with total capital for U.S. life insurers increasing 20% last year to about $300 billion. The sector also is crowded and fragmented, and competition from alternative savings products increasingly rewards those with scale and reach.
Rob Haines, a senior analyst at the independent research firm CreditSights, is among those who expects more mergers as companies look to put money to work. Potential acquirers include American International Group /zigman2/quotes/203700638/composite AIG -3.72% (AIG), which ended last quarter with $15 billion to $20 billion in excess capital; Prudential Financial /zigman2/quotes/203750923/composite PRU -1.16% (PRU), which has a good merger track record and more than $6 billion in untapped debt capacity; and MetLife /zigman2/quotes/206319319/composite MET -1.18% (MET), which until recently had been busy integrating its Travelers acquisition.
Screening for likely targets among companies with more than $10 billion in assets -- essentially those with attractive heft but which may lack the scale to compete in the long run -- Haines came up with names including Conseco /zigman2/quotes/206787831/composite CNO -3.16% (CNO), Phoenix (PNX), Protective Life (PL) and Unum Group /zigman2/quotes/208720096/composite UNM +3.86% (UNM). These stocks trade at 0.7 to 1.5 times book value and "could be fairly easy to digest by any one of the larger industry leaders," he notes.
Phoenix, for instance, could face mounting investor pressure to sell itself if the Hartford company fails to turn around its asset-management and life-insurance businesses. Its shares already reflect a takeover premium, but not everyone sees immediate takeout prospects. Morgan Stanley analyst Nigel Dally, for one, sees Phoenix using proceeds from a closed-block securitization to make its own acquisition, which could make it a less alluring target.
Conseco, which emerged from bankruptcy in 2003, has tended to attract hedge funds with an eye on value and a stomach for risk. The stock has slid 23% over the past two years, and the life and health insurer this month reported lower-than-expected first-quarter profits.
But at just 0.7 times book value, the stock offers an appealing risk-reward profile. It has improved claims management, and better cash flow has allowed it to buy back more shares. And "should the company fail in its attempts to solidify its fundamentals, we believe the company could emerge as a beneficiary of industry-wide consolidation," Dally notes.
WHAT'S NOT TO LIKE ABOUT BANANAS? The average banana has four times the protein of an apple, and five times the Vitamin A and iron. They're quick to eat, easy to digest, yummy enough to add to everything from breakfast to dessert. They also come with their own disposable packaging -- and in a sunny, happy color.
Still, Chiquita Brands International (CQB) has found a way to improve one of nature's perfect foods. Working with a small synthetic polymer company called Landec /zigman2/quotes/202795542/composite LNDC +1.35% (LNDC), Chiquita is introducing "intelligent packaging" to extend the shelf life of ripe bananas by up to 12 days. This allows bananas to be sold more widely at convenience stores, fast-food restaurants and even a Starbucks near you. It is also rolling out new products like "Chiquita Fruit in a Bottle," which has snagged a 5% share in its first market, Belgium.
The push to transform the 107-year old company "from a commodity produce supplier to a more value-added, healthy consumer products company" bodes well for profit growth, says Oppenheimer analyst Barry Sine, who expects per-share earnings to double to $1.50 next year from 75 cents in 2007.
The push toward higher-premium products isn't new -- Chiquita bought the Fresh Express package salad business in 2005 -- but the rollout of new products has gathered steam lately. So has the rally in its shares, up 15% this month to about 17.
Today, bananas drive nearly three-quarters of Chiquita's revenue. But bananas have image problems: They brown quickly, bruise easily and are difficult to transport and store. While international growth is robust, sales in the mature U.S. market are up just 5% since 2001.
Enter Landec's permeable polymer, which allows oxygen to enter the package and carbon dioxide to leave to extend freshness. Hoping that Americans will eat more bananas if they're fresher and more available, Chiquita has been testing individually cut and packaged bananas at some 8,500 locations, such as 7-Eleven and Cumberland Farms stores. It also is selling bananas in sealed packages of threes. Because these fetch higher prices, but don't cost more to grow, margins are better. Chiquita's grand plan: rolling out these new products at 200,000 non-traditional outlets.
At about 54%, Chiquita's debt-to-capital ratio is a tad high, and input costs are at the mercy of the weather and fuel prices. Salad profits also were hurt by an e. coli scare last fall, and will take time to recover. But given the steps that Chiquita is taking to reduce profit volatility, Oppenheimer's Sine reckons that the company's shares are worth 22.
Separately, Landec shares have climbed steadily to about 13.25, up 512% since 2003, as the Menlo Park, Calif., company worked off its debt, improved profits and boosted its cash stash to more than $2.25 a share.
Talk about enjoying the fruits of your labors!