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Two years after IPO, Fortegra still flying under the radar

by Mark Basch, Contributing Writer

Since going public two years ago, Fortegra Financial Corp. has generally flown under Wall Street's radar. The stock continues to trade below its December 2010 initial public offering price of $11 and it looks unlikely to reach that level any time in the near future.

Maybe it's because investors really don't know what Jacksonville-based Fortegra does. I have a hard time explaining the insurance services company myself.

Or maybe it's because even if they do know, Fortegra has no peer group for investors to compare.

"There are other small private companies that do what Fortegra does, but there are no close publicly traded peers," Sandler O'Neill & Partners analyst Paul Newsome said in a research report last week.

"Valuing Fortegra is not easy since there are no direct comparable public companies. This naturally leaves a lot of judgment in valuing the firm," he said.

Newsome initiated coverage of Fortegra with a "buy" rating but he set his price target at $10, which is higher than its recent trading range of about $8.50 to $8.80, but still lower than the IPO price.

Newsome's price target is 9.5 times his estimate of 2013 earnings, but he also said "depending upon which industry subgroup is used, comparable companies are trading at approximately 10 times to 18 times forward earnings."

So what is it that Fortegra does?

Well, in its own words, it "provides distribution and administration services and insurance-related products to insurance companies, insurance brokers and agents and other financial services companies in the United States."

Its largest business segment is payment protection services, which provides products like credit insurance to lenders.

"This segment specializes in providing products that protect consumer lenders and their borrowers from death, disability, or other events that could impair their borrowers' ability to repay a debt," Fortegra explains on its website.

Fortegra's other business segments are business process outsourcing, which provides administrative services, and a brokerage segment that helps insurers find coverage outside their main area of focus.

"The businesses all tend to be unified by an expertise in back office administration and technology," Newsome said.

He rates the stock a buy because he likes the long-term growth potential for Fortegra's businesses, and he said there is little insurance claim risk.

"While its business will fluctuate with the overall size of the insurance industry, it has limited exposure to actual insurance risk. Most of the insurance risk is borne by Fortegra's corporate customers," he said.

Besides the lack of a peer group, Newsome said there are a couple of risks to the stock. One is that investment firm Summit Partners still owns more than 60 percent of the shares, making relatively few shares available for trading.

Another risk is concern about expense control that helped send the stock down in 2011 after Fortegra's IPO.

"It is a small company and small changes in parent company expenses can make a material difference to quarterly earnings. In recent quarters, Fortegra has become more disciplined, and it appears expense controls have gotten much better," Newsome said.

Five of seven analysts following Fortegra rate the stock as a buy, according to Thomson Financial, but their target prices for the stock range only between $10 and $11. So it looks like the stock will continue trading below the IPO price for the foreseeable future.

Analyst sees more upside for FNF

It's been a good year for shareholders of Fidelity National Financial Inc., and Barclays Capital analyst Mark DeVries sees more good news in 2013.

DeVries last week raised his ratings on Fidelity and competitor First American Financial Corp. from "equal weight" to "overweight," based on a positive outlook for the title insurance industry.

"Despite the big moves in the stocks over the last year (FAF up 91 percent and FNF up 51 percent compared to up 19 percent for the S&P 500), we still believe there is enough upside at current levels (about 20 percent) to move to an overweight rating, particularly since we believe catalysts should remain positive in 2013," DeVries said in a research report.

He said Barclays' proprietary forecast for mortgage activity is 20 percent higher than some other national forecasts, and that will drive higher activity for title insurers.

Barclays is expecting stronger activity in the home purchase market next year.

"Given the intense focus on supporting the housing market from both the President and the Fed, and the housing recovery already under way, we believe our estimates are more likely to be too low than too high," DeVries said.

DeVries set a $28 price target for Fidelity, which has been trading near $23 for most of this month.

Web.com receives more support

Web.com Group Inc. is receiving a lot of plaudits from analysts these days.

Gene Munster of Piper Jaffray & Co. last week said Web.com, which provides website development services for businesses, is the firm's top Internet-related pick for 2013.

"Web.com is our favorite small cap investment idea due to its strong fundamentals, leverage to the secular growth theme of local commerce and consistent performance," he said.

"We believe that recent share weakness (down 18 percent since earnings) caused by its fourth-quarter guidance and concerns over small to medium business confidence create a good entry point for shares," he said.

Web.com shares had been trading at about $18 before its last earnings report in October but recently dropped below $15. Munster maintains an "overweight" rating and a $25 price target for the stock.

This follows a report by Hamed Khorsand of BWS Financial Inc., which set a $27 price target.

The average target price of analysts following the company is $21.82, according to Thomson. All 12 rate it as the equivalent of a "buy."

Munster said in his report that he is expecting better growth from Web.com in its average revenue per user, a key measuring stick for the company's performance.

"Specifically, the company will put more resources into upselling current clients and also television advertising, which delivers higher ARPU clients," he said.

Firm makes below-market offer for Kraft shares

Kraft Foods Group Inc. last week issued a news release that was basically a warning to stockholders about a "mini-tender offer" to buy their shares at a below-market price.

Kraft said a company called TRC Capital Corp. is offering to buy up to 2 million Kraft shares, representing just 0.34 percent of the stock, for $44 each.

The problem is, Kraft shares were trading above $46 for most of last week.

According to news reports, TRC Capital is a Canadian firm that has made this type of below-market mini-tender offer for shares of a number of companies in the past.

The practice is legal but it does raise red flags.

"Mini-tender offers are not subject to many of the investor protections afforded to larger tender offers, including the filing of disclosure and other tender offer documents with the Securities and Exchange Commission and other procedures mandated by U.S. securities laws," Kraft said in its news release.

The SEC provides warnings to investors about mini-tender offers on its website. The concern is that small investors who don't follow the market closely may not be aware that they are getting a below-market offer.

Kraft advised shareholders to check current market quotes for its stock and check with their financial advisors for guidance on their investment.

Rayonier buys more Texas timberland

Rayonier Inc. last week said it bought 62,600 acres of timberlands in East Texas for $88 million.

CEO Paul Boynton said in a news release that the land is within 60 miles of Houston and will support existing paper, pulp and solid wood customers, and also create opportunities for Rayonier's "higher-and-better-use land sales program."

The purchase gives the Jacksonville-based forest products company more than 150,000 acres in Texas. Rayonier owns, leases or manages a total of about 2.7 million acres of timberlands in 10 U.S. states and New Zealand.

Winn-Dixie closed for Christmas

Winn-Dixie shoppers probably haven't noticed much that is different since the Jacksonville-based supermarket chain merged with Bi-Lo LLC in March. But you may notice one major change this week: Winn-Dixie stores will be closed on Christmas Day.

After the company emerged from Chapter 11 bankruptcy in November 2006, Winn-Dixie decided to open most of its stores on Christmas Day that year. The company said the stores would be staffed with employees who volunteered to work on the holiday and stores that didn't receive enough volunteers would remain closed for the day.

It seemed like a great marketing idea to entice shoppers back to the stores, after the company lost customers in the years leading up to the bankruptcy.

Since Winn-Dixie was the only supermarket open, anyone needing last-minute groceries on Christmas would have no choice but to visit Winn-Dixie, and hopefully they would notice improvements in the stores.

The company had continued to open the stores on Christmas but now that Winn-Dixie is no longer an independent company, that tradition is apparently over. So if you think you need any groceries, you'd better shop today.

mbasch@baileypub.com

(904) 356-2466

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