Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. 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 or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015. 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 stock analysis showing a specific look at how Torchmark Corporation (TMK) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Torchmark Corporation is an insurance holding company. The Company’s segments include life insurance, health insurance, Medicare Part D, annuities and investment. The life insurance segment offers whole-life insurance, term life insurance and other life insurance products. The health insurance segment offers supplemental limited-benefit health insurance products primarily for cancer and accident plans. It also provides coverage under the Government’s Medicare Part D plan. The Company offers single-premium and flexible-premium deferred annuity products. The Company also invests in bonds, preferred stock, common stocks, mortgage loans, real estate, policy loans and others. Its primary subsidiaries are American Income Life Insurance Company, Liberty National Life Insurance Company, Globe Life And Accident Insurance Company, United American Insurance Company and Family Heritage Life Insurance Company of America.
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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
|Value Based on 3% Growth||$57.25|
|Value Based on 0% Growth||$33.56|
|Market Implied Growth Rate||3.42%|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
Torchmark Corporation qualifies for both the Defensive Investor and the Enterprising Investor. The company passes all of the initial requirements of both investor types, an indication that the company has a very strong financial position. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.63 in 2011 to an estimated $3.95 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.42% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.
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 Torchmark Corporation (TMK)? 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 any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.