Zenith National Insurance (ZNT) specializes in what looks like a boring business: workers' comp insurance. But "we love boring when it delivers steady earnings growth, which Zenith has done for the past seven years," says Michael Camp, a principal at Northwest Criterion Asset Management, which owns shares. The stock, now at 38.67, down from 55 on Jan. 31, is cheap, he adds. Matthew Carletti of investment outfit Cochran Caronia Waller upped his 2006 earnings estimate from $5.60 a share to $6.10 based on better-than-expected results in the second quarter. Zenith earned $3.73 last year. He says Zenith is "best-in-class," leading its peers in operating results and customer retention. By law, companies must insure employees against disability or death. Zenith's workers' comp premiums, mainly from California and Florida, accounted for 94% of 2005 revenues; the other 6% came from reinsurance, a business it had exited by yearend. Carletti sees Zenith's book value rising 50%, to $31.75, by the end of 2008, thanks to strong earnings growth and less need to build reserves against losses. Carletti's 12-month stock price target: 45.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial