Rules of the Game: Digging Into Financial Services

 | Apr 19, 2013 | 1:47 PM EDT
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With big banks reporting this week, it's easy to limit your view of "financials" to that particular category.

But this space also includes other financial-services companies -- among them, insurers. One of our holdings is Allstate (ALL), which deals in property, casualty and life insurance, and which is possibly best known these days for celebrity spokesman Dennis Haysbert. Investors usually have a bout of nail-biting when a big insurer reports a quarter that's suffered a big natural disaster. But, on Feb. 6, Allstate reported better-than-expected results for the fourth despite the impact of Superstorm Sandy. 

Before Sandy touched down, Allstate's nine-month operating income stood at $3.86 per share. The storm sent estimates south, with analysts eyeing a nickel-per-share loss. The company trounced those views, earning $0.61 per share for the quarter and $4.77 per share for the full year.

There was more for investors to cheer: The company upped its dividend to the tune of 13.6%, to $0.25 per share, and expanded its share-repurchase budget by $1 billion.

Allstate is due to report its first quarter May 1, after the bell. Analysts -- who missed it badly last time -- expect per-share income of $1.34 on revenue of $6.61 billion.

Insurers have some specific metrics that are pertinent to their financial health. One of these is a combined ratio -- which, below 100%, means the insurer is making an underwriting profit. A ratio above that level means the insurer is paying out more in claims than it is receiving in from premiums. Allstate has a combined ratio of 95.9%.

This week, Allstate shares retreated along with the market, pulling back from a nearly five-year high. As of Thursday's close, the stock was getting support above its 10-week moving average. This pullback could offer a good chance for investors to add to their positions at a lower price.

Another stock I have liked for quite some time is MasterCard (MA). The transaction processor has advanced just 6.05% year to date, although its price has more than doubled in the past two years. This company is part of the information-technology sector, but it often gets evaluated as a quasi-financial. Because of the global shift to electronic payments, MasterCards stands to benefit, even if consumers and businesses curtail spending.

This year, analysts see earnings of $25.48 per share, a gain of 16% over 2012. Next year, that's seen growing another 19%, to $30.20. MasterCard is set to report its first quarter before the bell May 1. Analysts expect earnings of $6.19 per share, a 15% climb vs. the year-ago quarter.  

Return on equity is a whopping 43%, and cash flow per share -- which I track as an indicator of financial health -- put in its fourth consecutive year of upside movement at MasterCard. Most recently, the number came in at $21.67.

So the long-term outlook for MasterCard continues to be positive. But, in the short term, don't be surprised to see shares continue their pullback. The stock already is consolidating from its April 1 high of $546.90. I wouldn't have any argument with investors who chose to take some profits at this juncture.

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