One of Wall Street's biggest winners of the day is Lincoln National, a life insurance company whose shares have climbed 6.5% to a price of $20.64 -- 15.34% below its average analyst target price of $24.38.
The average analyst rating for the stock is hold. LNC may have outstripped the S&P 500 index by 6.0% so far today, but it has lagged behind the index by 69.0% over the last year, returning -63.9%.
Lincoln National Corporation, through its subsidiaries, operates multiple insurance and retirement businesses in the United States. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
Lincoln National does not release its trailing 12 month P/E ratio since its earnings per share of $-18.85 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for LNC of -1.1. Based on the company's positive earnings guidance of $8.29, the stock has a forward P/E ratio of 2.5.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the finance sector has an average P/E ratio of 14.34, and the average for the S&P 500 is 15.97.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Lincoln National's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.34. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing LNC's growth potential .
Lincoln National's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 4,033,000 | n/a | 4,033,000 | 2570.86 |
| 2021-12-31 | 151,000 | n/a | 151,000 | -71.72 |
| 2020-12-31 | 534,000 | n/a | 534,000 | 119.88 |
| 2019-12-31 | -2,686,000 | n/a | -2,686,000 | n/a |
- Average free cash flow: $508.0 Million
- Average free cash flown growth rate: 25.8 %
- Coefficient of variability (lower numbers indicating more stability): 542.1 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, LNC is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Lincoln National's P/B ratio of 0.97 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Finance sector was 1.57 as of the first quarter of 2023.
Lincoln National is by most measures fairly valued because it has a negative P/E ratio, an exceptionally low P/B ratio, and irregular cash flows with an upwards trend. The stock has poor growth indicators because it has a a negative PEG ratio and average net margins with a positive growth rate.
