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 – July 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 XL Group Ltd (XL) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): XL Group plc is an insurance and reinsurance company providing property, casualty and specialty products to industrial, commercial and professional firms, insurance companies and other enterprises. The Company operates through two segments: Insurance and Reinsurance. The Company’s Insurance segment is organized into four product divisions: Global Casualty (Casualty); Global Energy Property, & Construction (EPC); Global Professional (Professional), and Global Specialty (Specialty). Its insurance operations provide insurance policies for corporate risks that may require large limits, use of a captive insurance company and the need for a program of locally issued policies. The Reinsurance segment provides casualty, property risk, property catastrophe, specialty, and other reinsurance lines on a global basis with business being written on both a proportional and non-proportional treaty basis, and also on a facultative basis.
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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||$10,494,679,110||Pass|
|2. Earnings Stability||Positive EPS for 10 years prior||Fail|
|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||-163.17%||Fail|
|5. Moderate PEmg Ratio||PEmg < 20||15.69||Pass|
|6. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||0.72||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||15.00%|
|MG Value based on 3% Growth||$31.98|
|MG Value based on 0% Growth||$18.75|
|Market Implied Growth Rate||3.60%|
|% of Intrinsic Value||40.76%|
XL Group plc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $-0.01 in 2012 to an estimated $2.21 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.6% 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.
XL Group plc receives an average overall rating in the ModernGraham grading system, scoring a C.
Stage 3: Information for Further Research
|Number of Consecutive Years of Dividend Growth||4|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2016|
|Long-Term Debt & Capital Lease Obligation||$2,646,324,000|
|Shares Outstanding (Diluted Average)||285,082,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$1.01|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.21|
Other ModernGraham posts about the company
|27 Companies in the Spotlight This Week – 4/4/15|
|XL Group Annual Valuation – 2015 $XL|
|17 Companies in the Spotlight This Week – 3/29/14|
|XL Group PLC (XL) Annual Valuation – 2014|
Other ModernGraham posts about related companies
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.