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ModernGraham Valuation: Travelers Companies (TRV)

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Company Profile (obtained from Google Finance): The Travelers Companies, Inc. (TRV) is a holding company. The Company, through its subsidiaries, is engaged in providing a range of commercial and personal property and casualty insurance products and services to businesses, Government units, associations and individuals. The Company is organized into three business segments: Business Insurance; Financial, Professional and International Insurance, and Personal Insurance. The Business Insurance segment offers an array of property and casualty insurance and insurance-related services to its clients primarily in the United States. The Financial, Professional and International Insurance segment includes surety and financial liability coverage’s, which primarily use credit-based underwriting processes, as well as property and casualty products that are marketed on a domestic basis. In November 2013, the Company completed the sale of its wholly owned subsidiary The Dominion of Canada General Insurance Company to The Travelers Companies, Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 6/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Calculator):

Key Data:

MG Value $86
MG Opinion Fairly Valued
Value Based on 3% Growth $96
Value Based on 0% Growth $56
Market Implied Growth Rate 2.33%
PEmg 13.17
PB Ratio 1.28

Balance Sheet – 9/30/2013

Total Debt $6,246,000,000
Total Assets $102,685,000,000
Intangible Assets $3,712,000,000
Total Liabilities $77,874,000,000
Outstanding Shares 364,100,000

Earnings Per Share – Diluted

2013 (estimate) $8.82
2012 $6.34
2011 $3.39
2010 $6.67
2009 $6.37
2008 $4.81
2007 $6.86
2006 $5.91
2005 $2.95
2004 $1.53
2003 $2.88
2002 $0.8

Earnings Per Share – Modern Graham 

2013 (estimate) $6.62
2012 $5.52
2011 $5.28
2010 $6.19
2009 $5.76
2008 $5.11

Conclusion:

As a financial or insurance company, Travelers is subject to some minor changes to the initial requirements for Defensive or Enterprising Investors.  The requirements utilizing the current assets and current liabilities have been eliminated in order to allow investors to use readily available information, and those items are not expressly listed in the balance sheets for financial and insurance companies.  With that in mind, such a company must pass all of the requirements for either type of investor and Travelers does.  As a result, Travelers may be suitable for either investor type to do further research.

From a valuation standpoint, Travelers appears to be fairly valued.  Earnings growth has been uneven, but is definitely present, having grown EPSmg (normalized earnings) from $5.11 in 2008 to an estimated $6.62 in 2013.  This growth is healthy and leads to a value that is within the margin of safety of where the company is trading today.  As a result, Defensive Investors and Enterprising Investors should feel comfortable moving forward with determining whether Travelers is the right fit for the individual investor at this time, after considering the 7 Key Tips to Value Investing.

What do you think?  Is Travelers Companies fairly valued?  Should the company only be considered suitable for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Travelers at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

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