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Insurance Stocks

American Financial Group Inc Valuation – January 2017 $AFG

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 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017.  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, focuses on commercial products for businesses, and is engaged in the sale of fixed and fixed-indexed annuities in the retail, financial institutions and education markets. The Company has 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 its approximately 30 insurance businesses. AFG’s property and casualty insurance operations allow local decision-making for underwriting, claims and policy servicing. The Company’s property and casualty insurance products include property and transportation, specialty casualty and specialty financial. The Company’s Specialty Casualty insurance products include Executive and Professional Liability, and Umbrella and Excess Liability.

AFG Chart

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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. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, 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 AFG – January 2017

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 $7,697,083,613 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 45.88% Pass
5. Moderate PEmg Ratio PEmg < 20 19.13 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.50 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

EPSmg $4.59
MG Growth Estimate 1.54%
MG Value $53.09
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $66.49
MG Value based on 0% Growth $38.98
Market Implied Growth Rate 5.32%
Current Price $87.72
% of Intrinsic Value 165.23%

American Financial Group Inc qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position . The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $4.16 in 2012 to an estimated $4.59 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.32% 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 below the price.

At the time of valuation, further research into American Financial Group Inc revealed the company was trading above its Graham Number of $77.93. The company pays a dividend of $1.12 per share, for a yield of 1.3% Its PEmg (price over earnings per share – ModernGraham) was 19.13, which was above the industry average of 18.78.

American Financial Group Inc receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Graham Number $77.93
PEmg 19.13
PB Ratio 1.50
Dividend Yield 1.28%
TTM Dividend $1.12
Number of Consecutive Years of Dividend Growth 11

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Long-Term Debt & Capital Lease Obligation $1,300,000,000
Total Assets $54,845,000,000
Intangible Assets $199,000,000
Total Liabilities $49,684,000,000
Shares Outstanding (Diluted Average) 88,457,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.54
Dec2015 $3.94
Dec2014 $4.97
Dec2013 $5.16
Dec2012 $5.09
Dec2011 $3.32
Dec2010 $4.36
Dec2009 $4.45
Dec2008 $1.67
Dec2007 $3.10
Dec2006 $3.75
Dec2005 $1.75
Dec2004 $3.21
Dec2003 $2.75
Dec2002 $0.82
Dec2001 -$0.15
Dec2000 -$0.63
Dec1999 $1.57
Dec1998 $1.33
Dec1997 $0.43
Dec1996 $2.53

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $4.59
Dec2015 $4.57
Dec2014 $4.78
Dec2013 $4.62
Dec2012 $4.16
Dec2011 $3.59
Dec2010 $3.64
Dec2009 $3.17
Dec2008 $2.58
Dec2007 $2.99
Dec2006 $2.78
Dec2005 $2.09
Dec2004 $1.91
Dec2003 $1.13
Dec2002 $0.41
Dec2001 $0.30
Dec2000 $0.70

Recommended Reading:

Other ModernGraham posts about the company

15 Best Stocks For Value Investors This Week – 2/13/16
American Financial Group Inc Valuation – February 2016 $AFG
12 Best Stocks For Value Investors This Week – 11/7/15
American Financial Group Inc. Valuation – November 2015 Update $AFG
The Best Companies of the Insurance Industry – October 2015

Other ModernGraham posts about related companies

Selective Insurance Group Valuation – Initial Coverage $SIGI
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Hartford Financial Services Group Inc Valuation – December 2016 $HIG
AFLAC Inc Valuation – December 2016 $AFL
Arthur J Gallagher & Co Valuation – December 2016 $AJG
Aspen Insurance Holdings Limited Valuation – December 2016 $AHL
MetLife Inc Valuation – December 2016 $MET
Travelers Companies Inc Valuation – November 2016 $TRV
Allstate Corp Valuation – November 2016 $ALL

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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