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 Companies Benjamin Graham Would Invest In Today – February 2016. 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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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass all 6 of the following tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$5,712,051,727||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||60.92%||Pass|
|5. Moderate PEmg Ratio||PEmg < 20||14.85||Pass|
|6. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.25||Pass|
|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
|MG Growth Estimate||3.60%|
|MG Value based on 3% Growth||$64.53|
|MG Value based on 0% Growth||$37.83|
|Market Implied Growth Rate||3.18%|
|% of Intrinsic Value||94.56%|
American Financial Group Inc qualifies for both the Enterprising Investor and the more conservative Defensive Investor. In fact, the company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research.
As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.59 in 2011 to an estimated $4.45 for 2015. This level of demonstrated earnings growth supports the market’s implied estimate of 3.18% 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.
Stage 3: Information for Further Research
|Number of Consecutive Years of Dividend Growth||10|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||Sep2015|
|Shares Outstanding (Diluted Average)||89,300,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.58|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$4.45|
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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.