HMN Stock Trading at Discount to Industry at 1.21X: Should You Buy?
Horace Mann Educators Corporation HMN shares are trading at a discount to the Zacks Multiline Insurance industry. Its forward price-to-earnings of 1.21X is lower than the industry average of 2.78X.
This company has a market capitalization of $1.5 billion. The average volume of shares traded in the last three months was 0.2 million.
Image Source: Zacks Investment Research
The stock, however, remains expensive compared with other players like Brighthouse Financial, Inc. BHF and Lincoln National Corporation LNC.
HMN shares have gained 11.5% in the past three months, outperforming its industry, the sector and the Zacks S&P 500 composite’s return in the same time frame. Strategic initiatives to fuel profitability, niche market focus and a solid capital position drive HMN shares.
HMN Vs Industry, Sector and S&P 500 in 3 Months
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HMN Trading Above 50-Day Moving Average
HMN shares are trading well above the 50-day moving average, indicating a bullish trend. Shares are trading near the high end of its 52-week range.
Growth Outlook Raises Optimism in HMN
The Zacks Consensus Estimate for 2024 earnings is pegged at $2.64 per share, indicating an increase of 71.4% on 7.2% higher revenues of $1.6 billion. The Zacks Consensus Estimate for HMN’s 2025 earnings is pegged at $3.64 per share, indicating an increase of 37.9% on 8.2% higher revenues of $1.7 billion.
Factors Favoring HMN
Horace Mann is the largest multiline financial services company focused on America’s educators. It operates in a niche market with a multiline model that provides earnings diversification. Its business mix is balanced between segments.
HMN files for auto rate increase in a well-planned manner. This, coupled with solid retention, will help it achieve underwriting profitability in 2024 and reach a target combined ratio of 97% to 98% in 2025. Auto premiums represent about two-thirds of property and casualty revenues. However, HMN bundles home with auto to serve educators efficiently. HMN stated that it continues to see physical damage trends moderating and expects to reach target profitability in 2025.
At its Life & Retirement, HMN leverages captive agents to serve its customers. Implementation of automated underwriting tools eases operations. Though the interest rate has been cut by 50 basis points by the Fed, HMN’s net investment income is expected to benefit from portfolio positioning.
Banking on operational excellence, Horace Mann increased its dividend for 16 straight years at a CAGR of 14%. Its current dividend yield of 3.4% is higher than the industry average of 2.3%. HMN targets a 50% dividend payout over the medium term. The company estimates generating about $50 million in excess capital annually to support growth initiatives, buy back shares and hike dividends.
Notably, its free cash flow conversion has remained more than 100% over the last many quarters, reflecting its solid earnings. It has more than adequate capital to continue to grow business.
With an expanded and efficient distribution channel, HMN is well-positioned and has significant cross-sell opportunities between worksite product lines.
Average Target Price for HMN Suggests an Upside
Based on short-term price targets offered by three analysts, the Zacks average price target is $39.00 per share. The average suggests a potential 11% upside from Friday’s closing price of $35.88.
HMN’s Unfavorable Return on Capital
Return on invested capital has been improving over the last few quarters, reflecting HMN’s efficiency in utilizing funds to generate income. However, ROIC in the trailing 12 months was 0.5%, comparing unfavorably with the industry’s average of 4.9%.
HMN’s return on equity has also been improving over the last few quarters, reflecting its efficiency in utilizing shareholders’ funds. However, the trailing 12 months ROE was 7.4%, which compared unfavorably with the industry average of 16.1%.
Mixed Analyst Sentiment on HMN
One of the two analysts covering the stock raised estimates for 2024 while one lowered it for 2025. The Zacks Consensus Estimate for 2024 earnings has moved 3.5% north in the past 60 days but moved down 1.6% for 2025.
Parting Thoughts
Horace Mann’s compelling portfolio poises this insurer well to capitalize on the solid opportunity in the K-12 educator market. A 4% increase in K-12 teachers is anticipated between 2023 and 2028. A demographic shift is expected as baby boomers retire and millennials make up a higher percentage of the workforce. The company stays focused on increasing its market share via a strong distribution model. The largest financial services company serving the U.S. educator market expects to generate a double-digit ROE in 2024 and beyond, banking on the strength of its diversified business. Its VGM Score of B raises hope.
However, an unfavorable return on capital, mixed analyst sentiment and lowered guidance for 2024, indicating lower-than-expected net investment income, keep us cautious.
Thus, it is better to adopt a wait-and-see approach for this Zacks Rank #3 (Hold) stock in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Lincoln National Corporation (LNC) : Free Stock Analysis Report
Horace Mann Educators Corporation (HMN) : Free Stock Analysis Report
Brighthouse Financial, Inc. (BHF) : Free Stock Analysis Report