Diversified Distribution And Cost Optimization Will Improve Future Profitability

Key Takeaways

• Diversified distribution and broad product portfolio are expected to drive consistent sales momentum, increasing future revenue and earnings.
  
• Strategic expansion and cost optimization initiatives are likely to improve sales growth, operational efficiency, and profitability.
  
• Reduced spend on direct-to-consumer marketing and higher surrender rates could hinder revenue growth and negatively affect margins.

Catalysts

Through its subsidiaries, develops, markets, and administers health insurance, annuity, individual life insurance, insurance products, and financial services for senior and middle-income markets in the United States.

• CNO Financial Group's diversified and integrated distribution model, along with a broad product portfolio, is expected to drive consistent sales momentum, which can lead to increased revenue and earnings in the future.
  
• The company's strategic expansion in the Worksite division, including geographic growth and new product offerings, is likely to result in continued sales growth, which could positively impact future revenue.
  
• CNO is focusing on optimizing its operations by reducing costs through outsourcing and staff reductions, which is expected to improve net margins and operational efficiency over time.
  
• The termination of a reinsurance agreement allowing CNO to retain 100% of long-term care new business suggests confidence in this segment's stability, which could result in higher retained earnings and improved profitability going forward.
  
• Strong investment results and a new money rate exceeding 6% are expected to enhance CNO’s portfolio yield, thus improving net investment income and contributing to earnings growth in the future.

CNO Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CNO Financial Group's revenue will decrease by -2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 10.2% in 3 years time.
• Analysts expect earnings to reach $425.5 million (and earnings per share of $4.4) by about December 2027, up from $274.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2027 earnings, down from 14.1x today. This future PE is lower than the current PE for the US Insurance industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 2.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.49%, as per the Simply Wall St company report.

CNO Financial Group Future Earnings Per Share Growth

Risks

• Reduced spend on direct-to-consumer marketing due to higher lead costs and competition could hinder revenue growth in the Life insurance segment.
  
• Execution risk in managing expense reduction initiatives, such as outsourcing and workforce reduction, could impact margins if not effectively implemented.
  
• Higher surrender rates in the fixed indexed annuity business may lead to increased amortization expenses, negatively affecting margins and earnings.
  
• Sustained economic pressures or changes in interest rates may impact investment income, affecting overall earnings stability.
  
• Potential regulatory approval challenges related to the Bermuda reinsurance platform could impact capital efficiency and equity utilization, influencing profitability.

Valuation

• The analysts have a consensus price target of $39.6 for CNO Financial Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.2 billion, earnings will come to $425.5 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 7.5%.
• Given the current share price of $37.52, the analyst's price target of $39.6 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.