Tuesday, May 31, 2011

Does it Pay to Put MetLife in Your Portfolio?

MetLife (NYSE: MET) reported strong earnings in May but its stock has been down 3% so far this year. Should you add MetLife to your portfolio?

MetLife is America's largest life insurance company. It sells a broad range of insurance and savings products -- including insurance, annuities and employee benefit programs -- to 90 million customers in 60 countries. In the last year, MetLife's revenues of $55.4 billion have grown at a 28.4% rate and its net income of $2.7 billion is up 210%.

Its stock price has been all over the map. It peaked in October 2007 at $71 and bottomed out in March 2009 at $12.22. Since then, it has climbed 260% to almost $44. This suggests a very important lesson for investors -- sometimes it makes sense to buy when everyone else is selling as they were when stocks bottomed out a bit over two years ago.

MetLife did well in the first quarter. Its $830 million in first quarter net income was 3% above the year earlier's net and its $1.33 in operating earnings beat Thomson Reuters I/B/E/ expectations by 5.6%. By purchasing life insurer Alico from AIG in a $16.2 billion deal in late 2010, MetLife's operating profit climbed 64% through the resulting expansion of its "footprint in Asia, Europe and Latin America," according to the Wall Street Journal.

MetLife's domestic business also did well. Its U.S. operating earnings rose 15% based in part on strong underwriting results in its group life-insurance business and its variable annuity sales rose 41% to a record $5.7 billion.

Some -- including M.D. Sass, reports the New York Times -- thought that the March 11 Japan earthquake was an opportunity to buy MetLife shares. That's because MetLife was among the most heavily exposed U.S. insurers to the Japanese market. But in May, MetLife forecast a relatively modest claims exposure in Japan ranging between $45 million and $65 million. Since then and May 27, MetLife's stock went up and down and now sits 4.2% below where it was the day before the Japan earthquake.

Is M.D. Sass right that you should add MetLife to your portfolio? To think about that, we can look at its price-to-earnings-to-growth (PEG) ratio — a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company’s earnings to grow. I think a PEG of 1.0 is a fair price, and anything below that is a bargain.

At a PEG of 1.33, MetLife is not exactly a cheap stock. Its P/E of 15.4 compares to earnings growth of 11.6% to $5.82 in 2012. If you are determined to buy the stock, you can certainly make the case that the 2012 estimate is low -- after all MetLife EPS grew 19% in 2011 and its more recent quarter did feature some strong earnings growth.

At its current price, I would wait for a better entry point for MetLife. It's a very big company that is growing aggressively and its stock has attracted some big name investors. But it looks like it will take a catastrophe that's more damaging to MetLife's perceived investment prospects to make its stock cheap enough to attract value investors.


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