Drivers Club Expansion And Critical Partnerships Fuel Dynamic Revenue And Margin Growth

Key Takeaways

• Strategic partnerships and operational efficiencies are projected to enhance revenue and sustainably grow profits, offering a positive outlook.
  
• Expansion of Hagerty's Marketplace and new product offerings could drive revenue growth and margin expansion through increased underwriting profits and platform scaling.
  
• Hagerty faces profitability challenges due to catastrophic events, market conditions, and execution risks on growth initiatives, with pricing strategy adjustments being crucial.

Catalysts

Provides insurance agency services worldwide.

• The continued growth in Hagerty Drivers Club and Media, along with value-added offerings, is expected to drive mid-teens compounding revenue growth, which indicates a positive outlook for future revenue gains.
  
• Introducing new offerings such as Enthusiast Plus through a recently acquired insurance company is likely to increase underwriting profits, contributing to margin expansion.
  
• The launch and build-out of Hagerty Marketplace is positioned to become a prominent platform for trading collectible vehicles, potentially boosting revenue and widening profit margins as it scales.
  
• Strategic partnerships, notably with State Farm, are anticipated to ramp up in 2025, representing a catalyst for enhancing revenue and providing a sustainable path to profit growth.
  
• Operational efficiencies, including cost discipline and technology investments like the Apex transformation, are expected to underpin margin expansion and improved net margins over time.

Hagerty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hagerty's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.8% today to 1.6% in 3 years time.
• Analysts expect earnings to reach $28.3 million (and earnings per share of $3.19) by about November 2027, up from $20.4 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 3.9x on those 2027 earnings, down from 49.5x today. This future PE is lower than the current PE for the US Insurance industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 70.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Hagerty Future Earnings Per Share Growth

Risks

• The occurrence of major catastrophic events, such as Hurricanes Helene and Milton, significantly impacts Hagerty's financials, as evidenced by a $30 million loss in the current outlook, potentially affecting net income and operating margins.
  
• Hagerty's loss ratio increased by 6 points year-over-year due to unusual catastrophe losses, with an underlying loss ratio of 44%, higher than historical averages, which could impact profitability if similar events continue.
  
• The competitive environment and hardening of the auto insurance market, while currently benefiting Hagerty, may also pose challenges if market conditions change, impacting revenue growth and member acquisition.
  
• Investments in key growth initiatives, such as the State Farm rollout and technology transformations, require substantial resources, with short-term impacts on margins and potential execution risks affecting earnings.
  
• The potential future need to adjust pricing strategies in response to industry trends or catastrophic events could affect revenue and customer retention if not managed effectively.

Valuation

• The analysts have a consensus price target of $11.5 for Hagerty 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 $1.7 billion, earnings will come to $28.3 million, and it would be trading on a PE ratio of 3.9x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $11.26, the analyst's price target of $11.5 is 2.1% 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.