We are downgrading StanCorp Financial (SFG) to Underperform from Neutral as we suspect organic growth will remain restricted in the near term, given the sluggish economic environment and challenging labor market conditions. Additionally, delinquencies on commercial mortgage loans are expected to remain modestly high in the foreseeable future.
Shares of StanCorp currently trade at 8.5x our earnings estimate for 2010, a 30% discount to the industry average of 12.2x. On a price-to-book basis, the shares trade at 1.0x, representing a 43% premium to the industry average of 0.7x. The valuation on a price-to-book basis looks fair, given a trailing 12-month ROE that is only 58% ahead of the industry average.
Our six-month target price of $36.00 equates to 7.8x our earnings estimate for 2010. Combined with the annual dividend of $0.80 per share, this target price implies a negative return of about 7.2% over that period. This is consistent with our Underperform recommendation on the shares.