In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period. Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation. We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before. By continuing to require the same standards for the historical period, Intelligent Investors are able to whittle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment. In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Ace Limited (ACE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): ACE Ltd (ACE) is a holding company. ACE is a global insurance and reinsurance organization, serving the needs of customers in more than 170 countries. It offers commercial insurance products and service offerings, such as risk management programs, loss control and engineering and complex claims management. It also provides specialized insurance products ranging from Directors & Officers (D&O) and professional liability to various specialty-casualty and umbrella and excess casualty lines to niche areas, such as aviation and energy. In addition, it supplies personal accident, supplemental health, and life insurance to individuals in select countries. ACE operates in four business segments: Insurance-North American, Insurance-Overseas General, Global Reinsurance, and Life. In April 2014, the Company and its local partner have acquired a 60.9% interest in The Siam Commercial Samaggi Insurance PCL, a general insurance company in Thailand, from Siam Commercial Bank.
Defensive Investor – must pass all 6 of the following tests: Score = 6/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$125.71|
|Value Based on 0% Growth||$73.69|
|Market Implied Growth Rate||1.72%|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Ace Limited qualifies for either the Defensive Investor or the Enterprising Investor. In fact, the company achieves the rare feat of passing all of the requirements of both investor types. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. As for a valuation, the company appears fairly valued after growing its EPSmg (normalized earnings) from $7.24 in 2010 to an estimated $8.67 for 2014. This level of demonstrated growth supports the market’s implied estimate of 1.72% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the market price.
Be sure to check out the previous ModernGraham valuations of Ace Limited (ACE) for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Ace Limited (ACE)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Ace Limited (ACE) or in any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.