Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp

Focused and disciplined, Employers Holdings (EIG) isn’t likely to ever be a fiery growth stock, but then I think you could argue that aggressive growth in insurance doesn’t often work out so well. Instead, Employers has delivered consistent shareholder value growth since going public by staying focused on its core market opportunity of underwriting workers’ comp insurance for small businesses in industries with low-to-medium hazard risk.

I’m less than comfortable making a big leap into a pure workers’ comp play today, though. The industry has benefited from an extended period of lower losses due in part to the benefits of the ACA and rates have come under pressure in recent years as a result of lower losses and strong returns. Worsening loss trends are a threat, as is a slowdown in employment growth, and more insurers are trying to target the smaller business markets that Employers has targeted. While I do think the shares are modestly undervalued today, another dip toward $40 would certainly get my attention.

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Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp

Core-Mark Races Out Of Wall Street's Doghouse

So much for Core-Mark (CORE) needing time to rebuild confidence in its business, or at least insofar as the Street goes. Core-Mark reported a solid, and certainly stronger than expected, second quarter, and not only have the shares rocketed back up, but the sell-side crowd is back to doing keg stands and conga lines to celebrate the company, and scratching around for excuses to boost price targets even though their actual estimates haven’t gone up so much.

Although I thought things were looking better for Core-Mark in May, I absolutely didn’t expect the shares to double in just three months. Management has certainly made better (and faster) progress in address cost issues in two of its West Coast locations and that seems to have restored a lot of faith in the overall business plan. What’s more, pressures on the cigarette business have normalized and the non-cigarette business continues to grow nicely. I liked Core-Mark more than the Street seemed to back in May, and I’m impressed with second quarter results, but I do think the sharp upward move in the shares more than adequately reflects the improvements in the business.

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Core-Mark Races Out Of Wall Street's Doghouse

Near-Term Trends Masking The Long-Term Potential For ProAssurance

Transitional periods are never fun, and ProAssurance (PRA) is likely looking at a couple of years where core earnings and book value growth will be pressured by rising claims costs. This is a sector-wide phenomenon, though, and many of ProAssurance’s competitors have been less conservative with their accounting assumptions and lack the same quality of reserves, which should lead to stronger industry-wide pricing.

Valuing ProAssurance is complicated by the likelihood that the near-term results aren’t really representative of the long-term earnings power of the business. Although there is a practical reality that insurance companies don’t usually outperform without underlying earnings and book value growth, I believe there is worthwhile long-term potential here.

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Near-Term Trends Masking The Long-Term Potential For ProAssurance

Simply Not Screwing Up Again Feels Like A Win With Core-Mark

The operating issues I highlighted in my last write-up on Core-Mark (CORE) continued to weigh on the company through fourth quarter earnings, with the shares down another third or so since the time of that article. Management has continued to struggle to generate attractive incremental margins from new chain store wins, while Berkshire Hathaway’s (BRK.A) (NYSE:BRK.B) McLane continues to compete aggressively for business and cigarette volumes continue to erode.

First quarter results offer some hope that maybe management and the sell-side have their expectations dialed in correctly, as there wasn’t a negative pre-announcement, results came in more or less on target, and management reiterated its full year guidance. While Core-Mark has been a big disappointment for a while now, perhaps management’s operating improvement initiatives are finally gaining some traction.

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Simply Not Screwing Up Again Feels Like A Win With Core-Mark

Better Late Than Never For MSC Industrial

One of the recent concerns about industrial maintenance, repair, and overhaul (or MRO) supply distributor MSC Industrial (NYSE:MSM) was why this leading distributor of metalworking tools (among other MRO supplies) was not seeing more benefit from the emerging industrial recovery in North America. Those concerns should ease a bit with the strong daily sales reported for the fiscal fourth quarter, but the company's long-term margin leverage remains a key question, and increased competition from Amazon (NASDAQ:AMZN) and now Berkshire Hathaway (NYSE:BRK.A) shouldn't be ignored.

I've owned MSC Industrial for some time, and I've written many times that when there's a conflict between "good company" and "good valuation", I go with the former. That said, there are legitimate arguments as to whether MSC is as good of a company as it used to be and whether today's valuation already captures a lot of what can go right for the business. Although I'm not rushing for the door, and there aren't a lot of clear bargains in the industrial space, it's hard for me to make a buy-case on the stock beyond a play on improving trends (momentum) in metalworking and related industries and at least a few more beat-and-raise quarters.

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Better Late Than Never For MSC Industrial

Core-Mark Needs To Start Hitting The Target Again

When I last wrote about Core-Mark (NASDAQ:CORE) almost a year and a half ago, I thought the shares seemed too richly valued even though the company was executing pretty well and had a lot of growth opportunities since then. I didn't necessarily expect the shares to drop about 25%, and I certainly didn't expect the company to start struggling to meet Street expectations for its earnings, but both have happened, and Core-Mark finds itself in a position where it has to rebuild its credibility.

Competitive wins and losses are part of the business, but I'm a little disappointed to see the higher expenses that Core-Mark has seen as it has shuffled its deck of clients. With that, the uncertainty over the Rite-Aid (NYSE:RAD) relationship looms a little larger. While 5% long-term revenue growth and mid-teens FCF growth can support a fair value more than 10% above today's level, the missteps over the past year or so need to lead to some lasting changes (for the better) in how management monitors and operates the business.

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Core-Mark Needs To Start Hitting The Target Again

Seeking Alpha: Core-Mark Continues To Deliver With A Plan That Can Drive Further Growth

While I had some concerns about Core-Mark's (NASDAQ:CORE) valuation back in March, and there was a noticeable pullback in April that lingered for a few months. The shares have fought back to just above break-even for the year as this large convenience store (or "C-store") distributor continues to deliver good same-store sales growth and EBITDA leverage.

My concerns about the valuation are still in place, but I do still see opportunities for Core-Mark to outperform in terms of customer acquisition (competitive wins and M&A), improved infrastructure utilization, and greater penetration of value-added services. Were the shares to offer up another 10%-plus pullback, I would certainly be more interested, but this at least looks like a credible hold for now.

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Core-Mark Continues To Deliver With A Plan That Can Drive Further Growth

Seeking Alpha: Sluggish European Demand May Be Opening A Window Into Innospec

I've liked specialty chemical company Innospec (NASDAQ:IOSP) as an operating entity for some time, but I've been less excited about the stock given its valuation. The shares are now down more than 20% from my initial write up and down a similar amount since my last write up, though, and that makes the risk-reward balance more interesting. While I do have some concerns that demand in Europe for the company's fuel additives will weaken further, I like the long-term outlook for the company's oilfield chemical and personal care performance chemical operations.

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Sluggish European Demand May Be Opening A Window Into Innospec

Seeking Alpha: Hartford Financial Services Offers Self-Improvement And Takeover Potential

Although The Hartford Financial Services Group (NYSE:HIG) (or "The Hartford") has taken several significant steps to reposition itself as a quality P&C operator, the Street hasn't fully bought into the story. While the shares have appreciated about 50% over the last three years, ACE Limited (NYSE:ACE) and Travelers (NYSE:TRV) have done even better (up more than 60% each) and there's little differentiation among them over the past year despite ongoing self-improvement efforts at The Hartford.

To be sure, there are some reasons for The Hartford to lag. The company's expense ratio is a little higher than its peer group (or at least the better-run members) and investors worry that the variable annuity run-off process will tie-up capital with poor returns and that the group benefits business won't improve as much as management hopes. Although the shares are near a 52-week high, that skepticism still creates a window of opportunity for investors; The Hartford is perhaps not the cheapest stock in the space today, but it is cheap enough to merit interest and it could be an acquisition target.

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Hartford Financial Services Offers Self-Improvement And Takeover Potential

Seeking Alpha: Core-Mark: A Great Small-Cap Play On Convenience

The convenience store (or "C-store") industry represents nearly $225 billion in in-store retail sales every year in the U.S. and Canada, and every one of those 175,000 or so stores needs distributors to deliver the goods they stock on their shelves. Core-Mark Holdings (CORE), the second-largest C-store distributor, continues to offer some attractive leverage to this market. Up about 18% from my prior write-up, the valuation isn't quite as compelling, but I believe Core-Mark can continue to be a share-gainer in a fragmented market, while leveraging the margin and cash flow benefits of providing value-added services to smaller clients.

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Core-Mark: A Great Small-Cap Play On Convenience

Seeking Alpha: Hanesbrands Looking To Double Down On Self-Improvements

What Hanesbrands (HBI) has done over the last few years is pretty impressive. Not only has the company consolidated and streamlined its manufacturing system and more than offset volatile cotton prices, but it has also managed to introduce new value-added products that carry significant premiums. Wall Street has absolutely noticed, taking the shares up over 160% in the trailing two years and nearly 90% in the last 12 months.

Now the company is looking to replicate those improvements across the 2013 acquisition of Maidenform. There are certainly many opportunities for Hanesbrands to cut redundant costs, streamline Maidenform's operations, and drive better utilization while augmenting their brand image. I believe that Hanesbrands will succeed in integrating Maidenform, but expectations have risen with the stock price. There is a significant opportunity to expand the activewear business and the company's share in overseas markets, and success there is going to be important to this stock continuing to outperform.

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Hanesbrands Looking To Double Down On Self-Improvements

Seeking Alpha: Core-Mark Holding Could Be A Core Holding

Investors who are familiar with distribution stories like Sysco (SYY) and United Natural Foods (UNFI) will see a lot of recognizable features in Core-Mark Holding (CORE). This company is still small in terms of market cap, but it is one of only two convenience store distributors to operate on a national scale. Not only could Core-Mark benefit by acquiring more C-store customers (through competitive gains or distributor acquisitions), but growth in the company's value-added services could offer powerful margin leverage in the coming years.

To be sure, this is a low-margin business and it will always be so. But if Core-Mark can close even just a small part of the gap in free cash flow margins between itself and the likes of Sysco or UNFI, the growth in free cash flow and the stock price could be impressive. These shares have already had a good run this year, but still look more than 30% undervalued to me today.

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Core-Mark Holding Could Be A Core Holding

Seeking Alpha: Allied World Has A Good Story, But Less Value

As I've remarked more than once in recent months, the melt-up in the insurance sector has taken most of the value out of the sector. So it would seem to be with Allied World Assurance (AWH). I really like what this company has done with its transition towards small/mid-market specialty casualty underwriting, and I think the company's reserve quality and balance sheet are both high quality. I also like the company's plans and prospects for ongoing premium growth in a variety of specialty niches and segments. All of that said, even projecting double-digit earnings growth and ROE isn't enough to generate a truly compelling fair value today.

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Allied World Has A Good Story, But Less Value

Seeking Alpha: Aspen Insurance Building Tomorrow's Growth At The Cost Of Today's Margins

Few bargains remain in the insurance sector, what with these companies having recovered significantly from the post-credit crisis lows. Valuations have moved up in conjunction with higher pricing across multiple sectors, but it is now starting to look like pricing is topping out in many (if not most) markets. Couple that with a still-weak investment environment and growing loss severity and I'm not surprised that many sell-side analysts are pulling back a bit from their bullish calls on the sector.

Aspen Insurance (AHL) finds itself in an interesting position amidst these changes. The company has followed a clear and stepwise transition towards becoming more of a primary insurance underwriter (versus a balanced insurance/reinsurance company), and the management believes that the insurance platform has matured to a point where it can retain more risk. Margins and returns have taken a hit in the course of building out the primary insurance business, and the Street is quite skeptical about Aspen's near-term ROE prospects, but the shares do seem modestly undervalued and could offer growth-driven upside.

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Aspen Insurance Building Tomorrow's Growth At The Cost Of Today's Margins

Seeking Alpha: Compass Diversified Holdings Looks To Build Value The Old-Fashioned Way

Business Development Companies (BDC's) have gotten quite a bit more attention in recent years, due at least in part to the exposure they offer to smaller companies and the potential for outsized distributions. While Compass Diversified Holdings (CODI) isn't a BDC, it's structured as a trust designed to acquire and manage controlling stakes in private companies, it seems "close enough for jazz" to many investors and analysts and the shares have done well lately.

I do believe this is an interesting company. Although valuation is higher than I'd like, I don't see a lot of risk in the company's portfolio, and I believe management's price and value discipline can serve companies well over the long term. Accounting rules make conventional valuation more challenging, and investors should take careful notice of the company's legal structure as a trust, but this is a name worth due diligence today and a spot on investor watchlists.

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Compass Diversified Holdings Looks To Build Value The Old-Fashioned Way

Seeking Alpha: Can Argo Group Self-Improve Enough?

I try to spend most of my investment research time on companies that I believe are well-run, or at least run better than the Street believes, but I can't deny that there can be significant rewards from investing in inferior companies in the process of getting better. That brings me to Argo Group (AGII). Argo has just not been a particularly good specialty insurance company, as its combined ratio and underwriting profitability have lagged its peer group for most of the past decade.

Management is trying to fix the situation, and with three straight quarters of underwriting profitability there may be some reasons for hope. The Street certainly thinks so, as the shares are up more than 30% over the past year. I do have my doubts as to whether management can hit the goal of 10% returns on equity, but the shares don't really seem overpriced today and there should be further upside if these self-improvement efforts bear more fruit.

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Can Argo Group Self-Improve Enough?

Investopedia: Arch Capital Is Excellent, But No Bargain

It feels as though it was a very long time ago when Arch Capital (Nasdaq:ACGL) last traded at a meaningful discount to fair value. But then, that's the price of excellence – there are few insurance management teams I'd rather invest with and the market is not shy about rewarding the shares for the skill of the team here. While there's always a chance that an active storm season could create an investment opportunity in Arch Capital, investors shouldn't this stock to offer many opportunities to buy at significant discounts to fair value.

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Investopedia: Hartford's Transformation Continuing To Unlock Value

A year ago, I was somewhat skeptical about Hartford's (NYSE:HIG) decision to transition out of its traditional life insurance and annuity businesses and towards a greater focus on P&C. While I thought the stock was cheap on a long-term ROE basis, I didn't expect the nearly 90% increase in the share price, nor the rapid pace of improvement in the company's legacy and going-forward operations. While the shares now have more average long-term potential on a ROE basis, there could still be upside left for these shares if Wall Street elects to value these shares more in line with other P&C companies with similar return characteristics.

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Investopedia: Greenbrier Comes Up Short Again

When last I wrote on Greenbrier (NYSE:GBX), I was, at best, tepid on this manufacturer of rail cars and parts for the railroad industry. Although the environment for railroad capex is pretty solid as major carriers like Union Pacific (NYSE:UNP), CSX (NYSE: CSX), and Norfolk Southern (NYSE:NSC) continue to enjoy solid operating cash flows (despite struggles in the coal business), Greenbrier has long lagged rivals like Trinity (NYSE:TRN) and American Railcar (Nasdaq:ARII) in terms of metrics like margins despite good market share.

Management has been saying the right things about prioritizing margins and reducing the capital intensity of the business. Along those lines, a serious restructuring of the Wheel and Parts business is a good move forward, and the new emphasis on tank cars should pay dividends. But as this quarter proves, this is a company where I think investors need to be careful about giving too much benefit of the doubt ahead of real signs of progress.

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Investopedia: CSX Adapating To New Realities

It wasn't long ago at all that the rails seemed to have things pretty much all going their way. Better management was producing better margins, pricing advantages over trucking were leading to good intermodal growth, and a recovering economy was supporting higher traffic and strong pricing. Then came a structural shift in electricity generation and a serious drought that hammered both coal and agricultural volumes.

To its credit, eastern rail operator CSX (NYSE:CSX) is rolling with the punches. The company is largely through the worst of the volume reset caused by declining coal demand, and while management has stretched out its margin improvement targets, there's still a pretty good case to be made for solid operating performance over the next few years. Unfortunately, the market has been quick to anticipate this and the shares don't look like a tremendous bargain today.

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