Square and Markel Earnings: What Investors Need to Know

Earnings season is coming to a close, and we recently heard from two of our favorite financials -- rapidly growing fintech company Square (SQ -4.53%) and insurance company Markel (MKL -0.38%). Here's a breakdown of the latest results and the important takeaways for investors.

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This video was recorded on May 13, 2019.

Jason Moser: Every year with the Berkshire Hathaway annual meeting, typically the next morning, there's what's called the Markel brunch. I went to the meeting once. We did the Berkshire meeting, and then we did the Markel brunch the following morning. That was a lot of fun. Markel times this out to where their earnings come out generally the same basic time as well. So we'll look into their quarter really quick.

Not a whole heck of a lot to dissect there. Operating revenues for the quarter of $2.5 billion, up from $1.6 billion from a year ago. Gross written premiums were $1.7 billion for the first three months of the year vs. $1.6 million last year. The combined ratio of 95% was a little bit higher than 90% from a year ago. That's the nature of insurance. We always just want to see that combined ratio below 100. Over time, Markel has done a very good job of doing that. Book value is now at $706.98, up 8% from $653.85 at the end of 2018. Book value, of course, is a measure we use to value insurance companies. I wouldn't call Markel cheap by any means. It's somewhere in the neighborhood of 1.5X book. But, listen, it's a high quality business. I can think of worse places to put your money.

If you remember, the headline a few months ago, the investigation into one of the reinsurance businesses. There is no news to this point on how that is proceeding. They just didn't have anything to release there. Nothing really to speak up there. Markel Ventures, that wing of the business, they're investing in and buying wholly owned businesses there, revenues there up $455 million for the quarter. That's really just turning into a nice revenue generator for the business. I really like it! Their investment portfolio all in all saw $612 million net investment gains in the equity portfolio. You look at some of those stocks that Markel holds, Amazon has been in there for a while. It's one of the things I've liked about Tom Gayner and team; they've been a little bit more forward-looking in that regard. Perhaps it's because they're a little bit younger. Regardless, if you look at their holdings, you see some of those tech-oriented names that really have done so well over the past several years.

With Markel, listen, I just look for the red flags to give me pause or to give me a reason not to own the stock. I don't find them in this quarter. I think we see them keep on doing what they're doing. Everything seems to be working out well. Good company to own. I own it myself. If you don't own it out there, and you're listening to this show, I encourage you to put it on your watch list. It's a nice one to look at in this environment of these really lofty valuations and unprofitable businesses.

Speaking of unprofitable businesses, Matt, let's talk a little bit about Square. While Square isn't necessarily yet to that sustainable profitability, it's coming soon. It's right around the corner. Looked like a pretty good quarter. Why don't you break down the latest in Square's earnings and what you see coming up for the business?

Matt Frankel: Sure. On an adjusted basis, Square actually made a profit, first of all. Adjusted. Take that with a big --

Moser: [laughs] Well, I've made the argument for a while, it seems like we live in this non-GAAP, adjusted world now. No matter what, you can pretty much adjust anything at this point. It's like, "Honey, did you take the dishes out of the dishwasher?" "Well, no, but if you adjust it back to, do I wish I did it? Yes. So, adjusted, I did unload the dishwasher. But in reality, I didn't." It does feel like we live in this adjusted world now. But, I digress. Go on!

Frankel: Right. Like, if I ask my wife what she spent shopping the other day, she could say, "Well, excluding one-time purchases, I didn't spend anything!" [laughs]

Moser: [laughs] "Babe, they're all one-time purchases."

Frankel: [laughs] Anyway, the numbers for Square look great pretty much all around. Square raised its revenue guidance for the year, but not its earnings guidance. But the numbers look great all around. 59% increase in adjusted revenue. Even if you back out acquisitions, it's 49% year over year. That's amazing growth, especially since it's been sustained for five or six years now. Gross payment volumes up over 20%. Subscription service revenue was the big standout. It more than doubled. It was up 126% year over year. Square said one of the biggest reasons is the Cash app, which I've been saying is the biggest growth engine that Square has, and it's going to really surprise people over the long run. Square Capital made 50% more loans year over year. They're expecting similar revenue increase in the second quarter. There's really not a whole lot not to like about how Square has been doing lately.

Moser: Yeah. I was looking at that myself. I mean, I agree. I think Cash App, today, while it's not this big monetizable engine, it really is a great engagement tool. I think what it does is, it gets people into that Square ecosystem. You're doing more with the services that they're offering. We use the Cash App just with our daughters, paying them money for chores done or whatever, if I need to give them money for whatever. It's very seamless and easy to use. It's interesting to see also as Square continues, and they made the Weebly acquisition, and they're going into a little bit more on the e-commerce side. They're competing a little bit more with Shopify. Shopify, getting into the hardware game now as well. We know they use Stripe as a payment provider. It's really neat to see Shopify and Square evolving, and really starting to become market leaders in obviously what is a very big market. I noted last week, you look at Square and Shopify together, the market's essentially valuing the same, but Square brings in about 3X the revenue of Shopify at this point. It's an interesting difference in expectations there. Both very good businesses. We like them both here at The Fool.

But, again, you look for the red flags in something like that, and we just don't see them. If you own shares of Square, you still ought to feel really good about it. It sounds like you feel that way, too.

Frankel Yeah, definitely. I mean, I bought Square shortly after its IPO, I haven't sold one share, and I don't plan on doing it. I haven't added much, just because every time I want to add, I talk about it on here and start telling everyone else to add. Hopefully some people took my advice when it dropped into the $40s late last year, when I wanted to buy it but couldn't shut up about it. Hopefully somebody took my advice!

Moser: I'm sure many did. Those pesky trading guidelines, we have to adhere to them.