Insurance Stocks

Marsh & McLennan Company Valuation – January 2016 Update $MMC

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 – November 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 Marsh & McLennan Company (MMC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Marsh and McLennan Companies, Inc. is a professional services firm. The Company operates as two business segments: Risk and Insurance Services, and Consulting. The Risk and Insurance Services segment provides risk management activities and insurance broking, reinsurance broking and insurance program management services for businesses, public entities, insurance companies, associations, professional services organizations and private clients. The Company conducts business in this segment through Marsh and Guy Carpenter. The Company conducts business in its Consulting segment through two main business groups: Mercer, provides consulting expertise, advice, services and solutions in the areas of health, retirement, talent and investments, and Oliver Wyman Group, provides specialized management and economic and brand consulting services.

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MMC

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 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $27,021,379,986 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.62 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 30.24% Fail
6. Moderate PEmg Ratio PEmg < 20 20.73 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.55 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.62 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.08 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MMC value chart January 2016

EPSmg $2.57
MG Growth Estimate 13.02%
MG Value $88.85
Opinion Undervalued
MG Value based on 3% Growth $37.30
MG Value based on 0% Growth $21.87
Market Implied Growth Rate 6.11%
Current Price $53.33
% of Intrinsic Value 60.02%

Marsh & McLennan Company qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets. 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 undervalued after growing its EPSmg (normalized earnings) from $1.38 in 2011 to an estimated $2.57 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.11% annual earnings loss 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 Marsh & McLennan Company (MMC)?  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

MMC charts January 2016

Net Current Asset Value (NCAV) -$11.16
Graham Number $28.08
PEmg 20.73
Current Ratio 1.62
PB Ratio 4.55
Dividend Yield 2.74%
Number of Consecutive Years of Dividend Growth 6

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep2015
Total Current Assets $5,526,000,000
Total Current Liabilities $3,404,000,000
Long-Term Debt $4,422,000,000
Total Assets $17,724,000,000
Intangible Assets $8,342,000,000
Total Liabilities $11,476,000,000
Shares Outstanding (Diluted Average) 533,000,000

Earnings Per Share History

Next Fiscal Year Estimate $2.93
Dec2014 $2.65
Dec2013 $2.43
Dec2012 $2.13
Dec2011 $1.79
Dec2010 $1.55
Dec2009 $0.42
Dec2008 -$0.14
Dec2007 $4.53
Dec2006 $1.76
Dec2005 $0.74
Dec2004 $0.33
Dec2003 $2.81
Dec2002 $2.45
Dec2001 $1.70
Dec2000 $2.05
Dec1999 $1.31
Dec1998 $1.49
Dec1997 $0.87
Dec1996 $1.04

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.57
Dec2014 $2.30
Dec2013 $1.97
Dec2012 $1.54
Dec2011 $1.38
Dec2010 $1.32
Dec2009 $1.29
Dec2008 $1.63
Dec2007 $2.36
Dec2006 $1.39
Dec2005 $1.34
Dec2004 $1.71
Dec2003 $2.29
Dec2002 $1.95
Dec2001 $1.63
Dec2000 $1.52
Dec1999 $1.15

Recommended Reading:

Other ModernGraham posts about the company

The Best Companies of the Insurance Industry – October 2015
5 Undervalued Companies with a Low Beta – June 2015
The Best Companies of the Insurance Industry – June 2015
The 8 Best Stocks For Value Investors This Week – 6/6/15
Marsh & McLennan Companies Analysis – June 2015 Quarterly Update $MMC

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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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