Insurance Stocks

Cincinnati Financial Corp Valuation – November 2015 Update $CINF

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 10 Most Undervalued Companies for the Defensive Investor – October 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 Cincinnati Financial Corp (CINF) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Cincinnati Financial Corporation is an insurance holding company. The Company is engaged in the business of property casualty insurance marketed through independent insurance agencies in 39 states. The Company operates through five segments: Commercial lines, Personal lines, Excess and surplus lines, Life insurance and Investments. It operates through its three subsidiaries: The Cincinnati Insurance Company, CSU Producer Resources Inc. and CFC Investment Company. Its market property casualty insurance group includes two of those subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group writes a range of business, homeowner and auto policies. Other subsidiaries of The Cincinnati Insurance Company include The Cincinnati Life Insurance Company, which provides life insurance, disability income policies and fixed annuities, and The Cincinnati Specialty Underwriters Insurance Company, which offers excess and surplus lines insurance products.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of CINF – November 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $9,917,953,915 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -22.27% Fail
5. Moderate PEmg Ratio PEmg < 20 19.39 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.58 Pass
Score
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

CINF value Chart November 2015

EPSmg $3.12
MG Growth Estimate 6.65%
MG Value $68.04
Opinion Fairly Valued
MG Value based on 3% Growth $45.27
MG Value based on 0% Growth $26.54
Market Implied Growth Rate 5.44%
Current Price $60.53
% of Intrinsic Value 88.96%

Cincinnati Financial Corp qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth over the last ten years.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.16 in 2011 to an estimated $3.12 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 5.44% 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 within a margin of safety relative to 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 Cincinnati Financial Corp (CINF)?  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.

Stage 3: Information for Further Research

CINF Charts November 2015

Graham Number $56.97
PEmg 19.39
PB Ratio 1.58
Dividend Yield 3.01%
Number of Consecutive Years of Dividend Growth 20

 

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Most Recent Balance Sheet Figures

Long-Term Debt $861,000,000
Total Assets $18,751,000,000
Intangible Assets $0
Total Liabilities $12,401,000,000
Shares Outstanding (Diluted Average) 165,500,000

Earnings Per Share History

Next Fiscal Year Estimate $3.72
Dec14 $3.18
Dec13 $3.12
Dec12 $2.57
Dec11 $1.01
Dec10 $2.31
Dec09 $2.65
Dec08 $2.62
Dec07 $4.97
Dec06 $5.30
Dec05 $3.40
Dec04 $3.28
Dec03 $2.10
Dec02 $1.32
Dec01 $1.08
Dec00 $0.66
Dec99 $1.38
Dec98 $1.28
Dec97 $1.61
Dec96 $1.19
Dec95 $1.21

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.12
Dec14 $2.69
Dec13 $2.41
Dec12 $2.12
Dec11 $2.16
Dec10 $3.02
Dec09 $3.51
Dec08 $3.93
Dec07 $4.33
Dec06 $3.70
Dec05 $2.68
Dec04 $2.10
Dec03 $1.45
Dec02 $1.13
Dec01 $1.09
Dec00 $1.14
Dec99 $1.36

Recommended Reading:

Other ModernGraham posts about the company

The Best Companies of the Insurance Industry – October 2015
The 20 Best Stocks For Value Investors This Week – 8/15/15
Cincinnati Financial Corporation Analysis – August 2015 Update $CINF
5 Speculative and Overvalued Companies to Avoid – October 2014
19 Companies in the Spotlight This Week – 8/9/14

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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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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