On Monday, Compass Point adjusted its valuation of HCI Group (NYSE:HCI) shares, a company specializing in homeowners insurance, by increasing its price target to $126, up from the previous $120. The stock, currently trading at $121.87 and near its 52-week high of $124.95, has shown remarkable strength with a 41.67% gain year-to-date according to InvestingPro data. The firm has chosen to maintain a Neutral rating on the stock.
The revision in the price target comes as Compass Point transitions to a valuation approach based on relative price-to-earnings (P/E) ratios, taking into account the return on tangible equity (ROTE) for HCI in comparison to its industry peers.
The analyst noted that the average ROTE for the Florida-based Homeowners insurance group is projected at 21% for 2025, with an average P/E ratio of 7.6 times. In contrast, HCI's estimated ROTE is expected to be significantly higher at 29.5% for the same period. With a current market capitalization of $1.28 billion and an "Excellent" Financial Health Score on InvestingPro, HCI demonstrates strong fundamentals.
Given HCI's superior ROTE, Compass Point believes the company warrants a higher P/E ratio of 9.0 times its 2025 estimated earnings per share (EPS) of $14.05. This calculation underpins the new price target of $126 per share. Additionally, HCI offers a dividend of $1.60 per share.
Despite the positive outlook on HCI's ROTE, the projected return based on the new price target is approximately 4.7%. Compass Point suggests that this limited potential return supports their decision to uphold a Neutral rating on HCI's shares. The firm indicates a preference for a more attractive risk-reward entry point before changing this stance.
In other recent news, HCI Group reported a pretax income of $14 million and diluted earnings per share of $0.52 in its Third Quarter 2024 Earnings Call. Despite facing hurricane-related claims, the company declared its 56th consecutive quarterly dividend of $0.40 per share.
Notably, HCI Group successfully assumed 42,000 policies from Citizens, contributing to a projected $200 million in total in-force premium. The company also announced the upcoming launch of a new carrier, Tailrow.
Recent developments include an underlying loss ratio under 25%, a combined ratio of 70%, and an increase in cash and investments by $490 million year-over-year. The company's CEO, Paresh Patel, expressed commitment to Florida's market without raising rates. Despite anticipating a net expense of $128 million from Hurricane Milton in Q4, HCI Group expects continued underlying profitability.
Looking ahead, HCI Group plans to expand outside of Florida and focus on risk selection and underwriting in response to climate challenges. The launch of the new admitted carrier, Tailrow, is expected to be operational by early 2025, marking another significant step in the company's growth strategy.
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