Finance

A Side-by-side Analysis of Horace Mann Educators Corporation (HMN) and HCI Group, Inc. (HCI)

Horace Mann Educators Corporation (NYSE:HMN) and HCI Group, Inc. (NYSE:HCI) 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect HMN to grow earnings at a 12.70% annual rate over the next 5 years. Comparatively, HCI is expected to grow at a 25.00% annual rate. All else equal, HCI’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Horace Mann Educators Corporation (HMN) has an EBITDA margin of 8.16%, compared to an EBITDA margin of 17.7% for HCI Group, Inc. (HCI). This suggests that HCI underlying business is more profitable. HMN’s ROI is 6.20% while HCI has a ROI of 10.50%. The interpretation is that HCI’s business generates a higher return on investment than HMN’s.

Cash Flow 

The value of a stock is simply the present value of its future free cash flows. HMN’s free cash flow (“FCF”) per share for the trailing twelve months was +1.69. Comparatively, HCI’s free cash flow per share was +0.28. On a percent-of-sales basis, HMN’s free cash flow was 6.09% while HCI converted 0% of its revenues into cash flow. This means that, for a given level of sales, HMN is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. HMN’s debt-to-equity ratio is 0.00 versus a D/E of 0.98 for HCI. HCI is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HMN trades at a forward P/E of 16.86, a P/B of 1.13, and a P/S of 1.32, compared to a forward P/E of 10.28, a P/B of 1.44, and a P/S of 1.46 for HCI. 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. HMN is currently priced at a 6% to its one-year price target of $35.00. Comparatively, HCI is -16.06% relative to its price target of $48.00. This suggests that HCI 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 3.30 for HMN and 2.60 for HCI, which implies that analysts are more bullish on the outlook for HMN.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. HMN has a beta of 1.06 and HCI’s beta is 2.36. HMN’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. HMN has a short ratio of 2.93 compared to a short interest of 18.37 for HCI. This implies that the market is currently less bearish on the outlook for HMN.

Summary

Horace Mann Educators Corporation (NYSE:HMN) beats HCI Group, Inc. (NYSE:HCI) on a total of 7 of the 13 factors compared between the two stocks. HMN has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, HMN is the cheaper of the two stocks on book value and sales basis, Finally, HMN has better sentiment signals based on short interest.

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