UPDATE: J.P. Morgan Reiterates Underweight Rating, Raises PT on Arch Capital Group
In a report published Monday, J.P. Morgan & Co. reiterated its Underweight rating on Arch Capital Group Ltd. (NASDAQ: ACGL), and raised its price target from $36.00 to $40.00.
J.P. Morgan noted, “We see a number of potential headwinds for ACGL that support our Underweight rating. First, we believe consensus estimates are somewhat optimistic relative to industry and company fundamentals. Our analysis suggests underlying earning power has been on the decline over the past several years despite relatively stable reported results, which have been supported by less predictable items—low catastrophes, higher reserve releases, FX gains, and alternatives. Second, recent operating performance appears more similar to peers' after a number of years of outperformance, and, we fear, could even fall below peers'. In addition, much of the company's earnings are coming from reinsurance, which is generally afforded lower valuations. Third, reserves, which have been an earnings tailwind, could contribute less to results going forward. Approximately one-third of ACGL's earnings over the past three years (normalizing for catastrophe losses, alternatives, and FX) have come from reserve releases. While reserves still appear redundant, we do not believe reserves are strong enough to match this historical contribution. With shares trading at a significant premium to both peers (on a sum of- the-parts basis) and historical P/E and P/B multiples, we believe valuation could contract significantly over the next 12 months.”
Arch Capital Group Ltd. closed on Friday at $41.64.
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Tags: J.P. Morgan & Co.