Q1 Preview: EPS Estimate Moves Higher Our Conclusion
We are very positive on the stock heading into Q1 results and have revised
our EPS estimate higher. We see potential upside from personal auto and
investment income. The stock has performed well YTD (>16%), but is off
from recent highs, leaving open the possibility for upside on a strong quarter.
DFY is scheduled to report May 9 and we would recommend adding ahead
of the quarter. Our price target increases from $46 to $47.
Key Points
EPS estimates and price target are revised higher: We have revised our
Q1 EPS estimate from $0.78 to $0.86. This is premised on a lower personal
auto combined (96%) and higher investment income ($50MM). Our price
target increases from $46 to $47 based on the increase to our 2025E EPS.
Expecting a very strong quarter for personal auto: We expect margin
expansion premised on double-digit rate increases and claims inflation
stabilizing in the mid single digits. On top of those established trends we saw
a very mild winter with very little snow. PGR reported very strong Q1 results
on similar trends. We have revised our Q1 combined ratio assumption from
98% to 96% and forecast premium growth of 6%.
Investment income should remain a source of upside: GoC 5-year bond
yields increased ~50bps from end of 2023 as the higher-for-longer scenario
gains traction. DFY stands to benefit from higher reinvestment rates. We
have revised our Q1 investment income forecast to $50.3MM, ahead of pace
relative to management guidance of $190MM for the full year. It is possible
that investment income guidance is revised higher.
No significant CAT events implies a good quarter for personal property:
We have not seen any reported CAT events in Canada and DFY did not
provide any update on expected CAT losses for the quarter. It should be a
good quarter for personal property in the absence of major CAT losses and
given premium rate increases. We forecast a CR of 87%, down from 91% a
year ago, and premium growth of 8%.
Commercial momentum to continue: Firm to hard market conditions
persist. DFY is also gaining market share. Double digit premium growth is
expected and we conservatively forecast 11% premium growth for the
quarter and the year (15% in 2023). We assume a 90% CR in Q1, which is
fairly consistent with results posted over the last two years.
Valuation: Currently trading at 14.6x P/E (2025 consensus), marginally
higher than the average of 14.5x over the last year and a premium to IFC at
14.2x ( 2025 consensus). There is potential for modest multiple expansion in
a higher-for-longer interest rate scenario.
Reporting details: DFY is scheduled to report May 9 after market close with
an earnings call on May 10 at 11:00 A.M. EST (Call Details TBD).