Old Republic International Corporation (NYSE:ORI) and The Travelers Companies, Inc. (NYSE:TRV) are the two most active stocks in the Property & Casualty Insurance industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ORI to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, TRV is expected to grow at a -1.18% annual rate. All else equal, ORI’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Old Republic International Corporation (ORI) has an EBITDA margin of 11.12%, compared to an EBITDA margin of 24.58% for The Travelers Companies, Inc. (TRV). This suggests that TRV underlying business is more profitable. ORI’s ROI is 8.60% while TRV has a ROI of 11.40%. The interpretation is that TRV’s business generates a higher return on investment than ORI’s.
The value of a stock is simply the present value of its future free cash flows. ORI’s free cash flow (“FCF”) per share for the trailing twelve months was +0.21. Comparatively, TRV’s free cash flow per share was +2.18. On a percent-of-sales basis, ORI’s free cash flow was 0.94% while TRV converted 2.18% of its revenues into cash flow. This means that, for a given level of sales, TRV is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. ORI’s debt-to-equity ratio is 0.33 versus a D/E of 0.29 for TRV. ORI is therefore the more solvent of the two companies, and has lower financial risk.
ORI trades at a forward P/E of 13.11, a P/B of 1.10, and a P/S of 0.87, compared to a forward P/E of 12.90, a P/B of 1.45, and a P/S of 1.22 for TRV. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ORI is currently priced at a -14.52% to its one-year price target of $23.00. Comparatively, TRV is -1.18% relative to its price target of $125.93. This suggests that ORI is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for ORI and 2.80 for TRV, which implies that analysts are more bullish on the outlook for TRV.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ORI has a beta of 1.31 and TRV’s beta is 1.22. TRV’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. ORI has a short ratio of 5.62 compared to a short interest of 3.43 for TRV. This implies that the market is currently less bearish on the outlook for TRV.
The Travelers Companies, Inc. (NYSE:TRV) beats Old Republic International Corporation (NYSE:ORI) on a total of 8 of the 13 factors compared between the two stocks. TRV is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, TRV has better sentiment signals based on short interest.