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Down Over 80%, is Pet Insurer Trupanion Worth the Risk Premium?

Is Trupanion stock one to go for? Image of Trupanion on phone with downed stock

As shareholders of pet insurer Trupanion Inc. (NASDAQ: TRUP) learned last month, when you post a net loss that's twice what Wall Street expected, things get a little fuzzy.

The May 5 post-earnings drop marked another leg down for the provider of medical plans for dogs and cats. After benefitting from a demand pull-forward effect during the pandemic, the company has fallen on hard times for reasons familiar to most industries.  

As pet owners can attest, pet food, supplies, grooming and boarding prices have increased significantly. Still, one of the biggest pet cost increases has been at the doctor's office. Veterinary inflation jumped 15% year-over-year in the first quarter, well above Trupanion's forecast. Higher operating costs caused the company to record a $24.8 million loss — nearly three times more than in the prior year period.

As founder and CEO Darryl Rawlings noted, however, expensive vet bills are a double-edged sword. On the one hand, the company must fork over more money to vet clinics. Conversely, it incentivizes pet owners to obtain medical coverage for their furry friends, which is why Trupanion grew revenue 24% last quarter. The bad news: this marked the seventh straight quarter of decelerating top-line growth.

Trupanion stock trades "ruff-ly" 86% below its December 2021 peak. It has the markings of a falling knife, an investment term that describes a stock that has experienced a sharp decline, but looks tempting. In the aftermath of May's high volume selloff, Trupanion's risk is sky-high even though its share price is near a six-year low.

Yet some think a turnaround is "paw-sible." In recent months, analyst and hedge fund sentiment around Trupanion has improved. With the ripple effects of dog and cat adoption expected to last throughout the decade, pet care spending may stay healthy for years. 

What is Trupanion's Growth Outlook?

Unfortunately, Trupanion's growth slowdown is expected to continue. Consensus revenue estimates for the next three quarters of 2023 imply 20%, 15% and 13% growth. With these figures roughly in line with vet inflation, investors will need to see significant work on the expense side of the income statement.

To believe Trupanion's equity risk premium is worth the potential reward, investors must believe moderate sales growth can lead to profitability. The pet insurance pioneer has enrolled more than 1.6 million pets, more than half of which are subscribers. While both metrics are up more than 20% from last year, they have yet to translate into profits.

Based on the current business model, positive earnings per share (EPS) may be at least two to three years away. But things may be going in the right direction. The consensus bottom line estimate for next year implies that Trupanion's net loss will be more than halved. How does it get there?

Insurance rate hikes could be a big factor. Last week, Trupanion announced that California approved an additional 12% rate increase, which brings the state's total approved rate increase to 21% over the last seven months. New York accepted the company's 18% rate increase, making it 25% in rate hikes since November 2022. 

With California and New York being two of Trupanion's largest markets, the approvals should have a major impact on pricing. Along with planned spending cutbacks and steps to improve operational efficiency, this could generate meaningful upside to future financial results.

Are Trupanion Shares Undervalued?

Even at depressed levels, Trupanion commands a premium valuation. Its price-to-book (P/B) ratio of 3.2 is the second-highest among small-cap property and casualty insurers. Only Palomar Holdings is more expensive. 

This doesn't mean a share price in the $20s isn't worth a wag of the tail. Trupanion's strong foothold in a large, underpenetrated pet insurance market positions it well for long-term growth. While pet health plans are common in places like Sweden and the U.K., just 3% of North American pet owners have coverage.

This week, Jeffries reiterated its "buy" rating on Trupanion following a positive meeting with the CEO. The analyst's $51 price target suggests the stock can more than double over the next 12 months. 

Gilder Gagnon Howe sees big upside as well. Last quarter, the hedge fund added a $68.7 million position, giving it an ownership stake of around 7%.  

If the company can improve profit margins over the next few years, Trupanion stock should start clawing its way back.

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