Insurance Stocks

American Financial Group Inc. Analysis – Initial Coverage $AFG

220px-American_Financial_Group_Logo.svgBenjamin 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 American Financial Group Inc. (AFG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): American Financial Group, Inc. (AFG) is a holding company engaged primarily in property and casualty insurance businesses. The Company, through Great American Insurance Group, provides property and casualty insurance, commercial products, and also engaged in the sale of fixed and fixed-indexed annuities in the retail, financial institutions and education markets. The Company operates in four segments: Property and casualty insurance, Annuity, Run-off long-term care and life, and Other. AFG’s property and casualty operations provide a range of commercial coverages through the approximately 30 insurance businesses. AFG sells traditional fixed and fixed-indexed annuities in the retail, financial institutions and education markets through independent producers and through direct relationships with certain financial institutions. Run-off Long-term Care receives renewal premiums on its in-force block of life insurance policies.

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Defensive Investor – must pass all 6 of the following tests: Score = 6/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. 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
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. 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

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $70.80
MG Value $102.26
MG Opinion Undervalued
Value Based on 3% Growth $72.62
Value Based on 0% Growth $42.57
Market Implied Growth Rate 2.82%
PEmg 14.14
PB Ratio 1.72

Balance Sheet – March 2015

Total Debt $1,061,000,000
Total Assets $48,307,000,000
Intangible Assets $201,000,000
Total Liabilities $44,622,000,000
Outstanding Shares 89,400,000

Earnings Per Share

2015 (estimate) $5.25
2014 $4.97
2013 $5.16
2012 $5.09
2011 $3.33
2010 $4.33
2009 $4.45
2008 $1.67
2007 $3.10
2006 $3.75

Earnings Per Share – ModernGraham

2015 (estimate) $5.01
2014 $4.78
2013 $4.62
2012 $4.16
2011 $3.58
2010 $3.63

Dividend History

Free Cash Flow

Conclusion:

American Financial Group Inc. 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 $3.58 in 2011 to an estimated $5.01 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.82% 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 American Financial Group Inc. (AFG)?  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.

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