Innovative Insurance Tech Spurs Growth And Market Expansion Amid Climate Challenges

Key Takeaways

• Continuous investment in proprietary insurance technology enhances efficiency and margins, expanding Crawford's market share in the fragmented loss adjusting market.
  
• Strategic shift towards reducing dependency on weather-related revenue streams for more stable earnings, supported by strong financial management and diversification.
  
• Crawford's financial stability is threatened by weather-related revenue volatility, competitive pressures, risky acquisitions, and heavy tech investment.

Catalysts

Provides claims management and outsourcing solutions for carriers, brokers, and corporations in the United States, the United Kingdom, Europe, Canada, Australia, Asia, and Latin America.

• The increasing severity and frequency of extreme weather events globally are expected to drive long-term growth in weather-related claims revenue for Crawford, impacting future revenue positively.
  
• Crawford's proprietary insurance technology, which saves clients time and money, through continuous investment in developing, enhancing, and deploying advanced technology solutions, is expected to contribute to increased efficiency and potentially expand net margins.
  
• The company is gaining market share in the fragmented U.S. independent loss adjusting market and solidifying partnerships across all verticals, which should lead to an increase in revenue and improve the company's competitive position.
  
• Crawford’s conservative approach to capital management and strong balance sheet, coupled with a low leverage ratio, provide significant financial flexibility and liquidity for strategic acquisitions and partnerships to expand market share, likely enhancing earnings.
  
• The diversification of Crawford’s revenue mix, with 6% growth in non-weather business in the face of a 21% decrease in weather-related business, suggests a strategic shift towards reducing dependency on weather-dependent revenue streams, which could lead to a more stable and predictable earnings growth.

Assumptions

• Analysts are assuming Crawford's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $82.3 million (and earnings per share of $2.07) by about September 2027, up from $22.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2027 earnings, down from 23.7x today. This future PE is lower than the current PE for the US Insurance industry at 14.1x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.58%, as per the Simply Wall St company report.

Risks

• The dependence on weather-related revenues introduces volatility and uncertainty, which could impact future revenue stability, particularly if benign weather conditions continue or intensify, reducing the demand for Crawford's catastrophe-specific services.
  
• The company's mention of a difficult comparison to elevated catastrophe activity in the first half of 2023 suggests that any decrease in severe weather events could lead to reduced revenues, directly impacting net margins by lowering income from high-margin catastrophe response services.
  
• Any challenges in continuing to gain market share in the fragmented U.S. independent loss adjusting market could hinder revenue growth, especially if competition intensifies or market dynamics shift unexpectedly, impacting earnings.
  
• The reliance on strategic acquisitions for growth introduces risks associated with integration and realizing projected benefits from these acquisitions, potentially affecting revenue and net margins if these deals do not yield the expected results or incur unforeseen costs.
  
• The heavy investment in technology and innovation, while necessary for long-term competitiveness and efficiency, requires substantial capital expenditure and poses a risk if these investments do not deliver the anticipated returns in terms of increased efficiencies and client acquisition, potentially impacting earnings and net margins.

Valuation

• The analysts have a consensus price target of $11.0 for Crawford based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.5 billion, earnings will come to $82.3 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 6.6%.
• Given the current share price of $11.07, the analyst's price target of $11.0 is 0.6% lower. 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.