Markel: My Top Stock in a High Inflation Environment (NYSEMKL).

When buying stock in a high-inflation environment, the most important thing to remember is that high inflation can and will come and go. It was 10 years long in the 1970s. However, current conditions are unlikely to produce the same level of staying power. power. The market believes that it will fall to just over 3% in five year for straight Treasuries as well as TIPS. The stock that will perform well in all economic environments is a great stock for inflation. This narrows down the options.

When you compare the declining value of money to stocks, you will often find that stocks are an asset class that performs well. Stocks grew faster during the hyper-inflation in the German 1920s. They did less well in America’s 1970s, although companies continued growing earnings and paying rising dividends despite a falling price earnings ratio causing stock prices to fall. The 1970s saw poor operational performance in US companies, which led to the bull market that began in 1982. Over the past 100 years, the average inflation rate was about 3%. This has lowered the nominal stock return of 10% to 7%. Stocks still won big time. This makes it more attractive to invest in growth stocks at a low price during times of high inflation.

The ideal stock for high-inflation environments is one that combines defense and offense. It should be able maintain or increase its margins due to pricing power, either through strong brands or by selling products and services that its customers cannot do without. It should be able to withstand rising labor and material costs, disruptions in supply chains, and other risks. Because of rising rates and disruptions in supply chains, it should have low debt. It also helps to achieve a high return capital. It should grow. It should be able to trade at a reasonable price. Markel, a property-casualty specialty insurer, is my choice for the company that ticks all the boxes.NYSE:MKL)

Markel Still Runs Like A Family Business with Great Management and Quality Shareholders

Markel was established in 1930 by Sam Markel to provide coverage for jitney buses. I grew up in the deep South and am familiar with jitney busses and cabs. These buses have been able to provide service at a very affordable price to members of the black community who otherwise couldn’t afford cabs or buses to take them into their neighborhoods. Writing insurance for “jitneys”, in 1930 Virginia, required both financial and moral courage. This may have also set the tone for Markel’s future. It was undoubtedly an educational experience in the risks and benefits of specialty insurance.

Markel remained a family company until its 1986 IPO for $8.13. Investors love or hate family businesses. Family businesses tend not to pay attention to their capital, look long-term, manage taxes, avoid dividends (mainly a burden on the tax system), and compound money at an amazing but slow rate. That’s Markel. Insurance is all about capital and risk. Nobody watches these things like a family. Strong management is essential in an industry without a natural moat. It is important to have underwriting discipline. Markel has successfully managed the difficult transition to family leadership to the current Co-CEOs Tom Gayner (on Ventures, Investments, and Ventures) and Richie Whitt who came from the insurance sector.

MKL’s overall structure resembles Buffett’s Berkshire Hathaway. (BRK.B.A) It is often called a “mini Berk.” It is most similar to the Berkshire in the 1970s when it was diversifying away from its insurance businesses and gradually shifting to replace fixed income with equities. The perfect leader for this transition is Tom Gayner, whose legendary equity investment skills are unmatched. Markel’s Win-Win-Win philosophy, which is often repeated, describes Markel’s commitment to employees, customers and shareholders. All of them are considered partners. This philosophy is based upon the belief that profits and growth can be achieved if you do things right.

Markel by the Numbers: A Value Stock with Strong Growth

Markel’s primary business is still insurance, but its investments as well as the wholly- or largely-owned subsidiaries of Markel Ventures continue to grow and should play an increasing role in its future. All three areas are experiencing strong growth at the moment. Below the stock chart are selected key statistics of the SA Financials. The revenue, net income, and long term debt are all in billions. Shares are in the millions. Earnings per share, free cash flow pershare and earnings per share are in dollars.

This ten-year chart clearly shows the lumpiness in many metrics. In 2018, negative net income and earnings per shares reflect severe weather-related catastrophe losses. The market cap is 22%. Long term debt is the lowest row. The 2021 Gangbusters Results reflect a year where all three business units, investments, Markel Ventures, and insurance, had great years.

The growth rate in the most important metrics is amazing. Revenues grew from $3 billion in 2012 up to $12.8 million in 2021. This quadrupling of revenue was achieved at a CAGR around 15%. This kind of top-line growth is rare, except for the fastest growing tech companies. The second row’s Net Income growth is even more impressive, at over 20%. Even if 2021 proves positive, when all three Markel parts had banner years of their own, the fact that income growth was greater than revenue growth is a reflection of Markel’s intense focus on profitability.

The Three Engines Of Growth: Insurance and Investments.

Markel’s four priorities in capital allocation are (1) support for its existing businesses; (2) acquiring new businesses; (3) acquiring publicly traded stock options and (4) repurchasing share. Insurance provides stability and the float to which investments can be made. Insurance, despite the lumpy returns inherent to its combined ratio, combines long-term defensive characteristics with the ability of raising prices. In an inflationary environment, insurance companies can roll over maturing fixed-income instruments into fixed instruments with higher yields. This is another advantage. If the Fed does as expected, that could translate into a 3-4 percent increase in interest rates as bonds with shorter maturities are transferred. Although it may seem counterintuitive, insurance stocks can provide strong defense and offense in an inflationary environment.

Markel is conservative when it comes to investments. He believes that fixed income should fully pay all estimates. CoCEO Gayner reduced the equity allocation as soon as the pandemic’s effects became apparent. My best calculation (which uses reported equity returns, reported fixed income returns equaling total returns to calculate the equity/fixed rate) shows that Markel’s equity ratio dropped from 39% to 26%, as measured by the numbers in the Q4 earnings call. If these numbers are reliable and sustained, it could be serendipitous. The current market decline will undoubtedly take a toll on Tom Gayner’s equity portfolio. Bonds will also suffer. Investors should ignore the effect on earnings of unrealized gains or losses in the Markel portfolio investment portfolio.

Markel Ventures, which was formed as a unit in 2005 has also used cash flow and insurance flot to source capital. Markel prefers to break out five-year averages. This is because Markel prefers to use results for employee reward. Markel generated 5-year revenues of $9.3Billion 2016-2020, $3.4Billion 2011-2015 and $0.4Billion 2006-2010. For the same periods, its EBITDA was $1.167billion, $354m, and $45m respectively. The results include organic growth and acquisitions. There were two in 2020-2021. Both of them were worth between $200 million and $300 million. Markel Ventures’ growth and emergence means that Markel Ventures’ book value is decreasing. While the acquisition of companies remains on the books at the purchase prices, it is clear that businesses as a whole have increased in value. Markel Ventures’ rapid growth contributes to Markel Ventures’ high return on capital. It also contributes to a growth rate that can simply outrun inflation, which is the traditional inflation hedge provided by equity investments.

Markel’s price/book value ratio of about 1.4 is cheap enough to buy, but a bargain for a company like Markel. Markel buyers might use the same value update Warren Buffett uses with Berkshire. Their wholly-owned subsidiaries have similarly run from the price at the which they are held on the books. A potential buyer might use “business Value” as a ratio, perhaps 1.35 to be the better number.

Markel has outperformed the S&P 500 in the early 1990s, just a few years after its IPO. This is also true for 2022. The chart below shows the success and growth that Markel Style brings.

Markel and Microsoft, (MSFT), went public the same year in 1986. Microsoft was the biggest winner since 1986 due to its extreme outperformance and other tech stocks. But, it is worth noting that Microsoft has been at its peak since 2000. It is possible to win some wagers on which stock performed better since 2000. Markel is a growth stock in any case.

Highly Favorable SA Factor Ratings and Quant Grades

Here are the Factor Rankings:

Quant Rankings ranks Markel 48th out of 623 for the Financial Sector, 4th out of 48 for the Property and Casualty Sector and 48th out of 623 overall. It is ranked to outperform its market.

Markel Ratings are given by SA Authors. They include one Strong Buy, one Buy and one Hold. Wall Street Analysts give one Strong buy, one Buy (two Holds), and one sell (one Sell). It is clearly not popular.

Markel will repurchase shares at the appropriate price. After the pandemic of 2020, shares were not repurchased. They were reinstated in 2021 with 163,000 shares for around $200 million.

Markel’s growth promise is confirmed by first quarter earnings, despite misleading headline numbers

Yesterday’s Q1 results from Markel, released after market close, showed excellent operational results. Earned premiums increased year over year, rising from $1,497.695 to $1.759,770, an increase of 17%. Due to reduced claims for catastrophe losses, the combined ratio rose from 0.94 % to 0.89 %. Markel Ventures’ operating revenue rose from $706 602 to $950 392 due to the two new acquisitions, as well as growth in other businesses. 63,000 shares were repurchased in Q1 20,22.

No one likes to see negative numbers, or a drop in book value (from $1053.53 to $1995.53). However, the losses reflected a decrease of fair value for both the fixed and equity portfolios. The 2016 accounting rule change, which Warren Buffett described as “wildly capricious” and should be ignored by analysts and other sophisticated observers, caused the decreases. For this reason, fixed income instruments in insurance portfolios tend to be held until maturity. This is when temporary price changes will disappear. The equity portfolio is made up of blue-chip growth stock that may continue to be affected by the current negative markets, but will likely recover quickly following what is mainly an appraisal correction. Here’s an example: LinkTo the Markel/Tom Gayner portfolio holdings.

Risques

A specialty insurance company that takes on unusual risks must accept and deal with risks. Unexpected risks, such as event cancellation or business interruption during the pandemic lockdown, can cause havoc. Natural weather events can also cause chaos. These numbers show how Markel was affected by such events in recent years. They also show how Markel responded to them and how quickly he snapped back. Although the insurance events account for the lumpiness in returns, long-term charts show how Markel handled them.

Markel’s equity and fixed portfolios will continue to fluctuate in line with the market. The equity portfolio is conservative, with a long track record of excellent performance. Markel Ventures’ biggest risk to operational results is supply chain problems. However, in 2020’s crisis year, despite safety concerns and supply chain issues, Markel management adapted quickly to the situation.

Conclusion: Markel Should Do Well Long-Term in A High Inflation Environment.

Markel doesn’t directly confront inflation by producing or processing a product. Markel’s strength in inflationary situations comes from having both a strong offense and a strong defense, even when hard assets are losing ground relative to money. Markel is not a big consumer of material and has shown flexibility in adapting to changes in labor costs and supply chains. The insurance industry is able raise prices. As interest rates rise, assets that are deemed uneconomic will be replaced by fixed portfolio assets with higher yielding alternatives. Growth is Markel’s secret weapon. Its 15% long-term revenue CAGR and even higher earnings growth explain how it will outrun inflation. It’s a strong buy. It’s my favorite.