FRF – Dealmaking Should Help Launch Fortegra Financial in 2014


Editor’s note: This column is part of our Best Stocks for 2014 contest. Hilary Kramer’s pick for the contest is Fortegra Financial (FRF).

best-stocks-for-2014-ftf-stockFinancials have performed well this past year. The Financial SPDR (XLF) is up close to 30% year-to-date, ahead of the S&P 500’s 25% gain. However, one of my favorite stocks in this sector isn’t a traditional bank or financial company, but I still like its potential and think it also could be an attractive acquisitions candidate.

That company is Fortegra Financial (FRF).

Fortegra Financial provides payment protection and other insurance services. It has worked to expand its product offerings in the fastest-growing areas of insurance to increase its customer base while meeting their biggest demands. That growth potential is strong, and a string of acquisitions will also help build the company’s business and open up new sources of revenue.

FRF began as a credit insurer in the southern U.S. in the late 1970s, but has since developed into a “revenue enhancer” for its corporate customers throughout the country with its credit insurance, service contracts and warranty products. The company also administers direct response marketing for insurance companies, and has a wholesale insurance brokerage unit.

Fortegra’s three operating units are Payment Protection, Brokerage (although it recently sold its Bliss and Glennon and insurance brokerage companies to AmWins Holdings LLC, which will enable FRF to deleverage its balance sheet and gain additional capacity for stock buybacks in the future), and Business Process Outsourcing.

These three business segments are what make FRF stock tick now, but this is not a company to rest on its laurels. Management is focused on innovation and expanding into new products and services, and will also look to move into new geographic markets in the U.S.

Management has made several acquisitions over the years (spending more than $100 million since 2009), and they will continue to be an avenue of growth for FRF stock into the future. Two important acquisitions were made right at the end of 2012, including Digital Leash, which provides insurance protection for mobile wireless devices, and 4warranty Corporation, an extended service contract administrator.

Also keep in mind that Fortegra Financial is 63% owned by private equity firm Summit Partners. With such a dominant ownership, Summit cannot be pleased that FRF stock is trading well below its June 2010 IPO price of $11, and probably will consider all methods to raise the stock price, including a sale of the company. In fact, management recently indicated it would consider all alternatives to add to shareholder value, so I’m watching closely for a buyout at what I expect would be a nice premium to the current FRF stock price.

Fortegra is certainly a very attractive candidate, and has reported good earnings since becoming a public company (albeit, they’ve occasionally disappointed analysts). While the most recent report was just shy of the Street’s estimates, management guided for an improved fourth quarter.

Based on FRF’s solid track record, I expect it to move higher in the coming months. I like that much of the company’s revenue is recurring in nature, thanks to the client relationships it has built in its 30-year history. I also have a lot of confidence in Chairman and CEO Richard Kahlbaugh, whose previous experience as president and CEO of Volvo’s Global Insurance Group gives him considerable experience with the company’s products.

Fortegra Financial has the recurring revenue and predictable earnings model that is currently in favor with the market. Further growth is ahead, and FRF definitely is a possible takeover target. Even so, management has internal growth plans and is cutting costs, so I like its potential.

FRF also is a small-cap stock, and those tend to do better at the beginning and the end of the year.

In addition, FRF stock is cheap right now at just more than 8 times expected 2014 earnings, is deleveraging its balance sheet and gaining additional capacity for stock buybacks in the future.

All that makes FRF the perfect pick for the Best Stocks for 2014 contest.

Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10 and High Octane Trader. As of this writing, she was long FRF in her High Octane Trader portfolio.

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