In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period. Â Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation. Â We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before. Â By continuing to require the same standards for the historical period, Intelligent Investors are able to widdle down banks to only those with the best financial position, and then they are able to determine an intrinsic value toÂ get a sense of whether the company is a good investment. Â In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. Â This isÂ 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. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Hartford Financial ServicesÂ fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Hartford Financial Services Group Inc., formerly The Hartford Financial Services Group, Inc., is an insurance and financial services company. The Company is a provider of investment products and life, property, and casualty insurance to both individual and business customers in the United States of America. The Company maintains a retail mutual fund operation, whereby the Company, through wholly owned subsidiaries, provides investment management and administrative services to The Hartford Mutual Funds, Inc. and The Hartford Mutual Funds II, Inc. (collectively, mutual funds), consisting of 57 mutual funds, as of December 31, 2011. The Company operates in four segments: Commercial Markets, Consumer Markets, Wealth Management and Runoff Operations. In October 2011, the Company sold Trumbull Services, LLC to ExlService Holdings, Inc.
Defensive Investor – must pass all 6 of the following tests: Score = 3/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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 – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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 = 2/3
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$23.33|
|Value Based on 0% Growth||$13.67|
|Market Implied Growth Rate||6.57%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
HartfordÂ Financial does not qualify for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor has concerns with the lack of earnings growth or stability or growth over the last ten years, and the high PEmg ratio. Â The Enterprising Investor is concerned by the lack of earnings stability over the last five years. Â As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review ofÂ ModernGraham’s valuation of JP Morgan Chase (JPM)Â andÂ ModernGraham’s valuation of Wells Fargo (WFC). Â From a valuation side of things, the company does appear undervalued after growing its EPSmg (normalized earnings) from $0.04 in 2010 to an estimated $1.61 for 2014. Â This level of growth outpaces the market’s implied estimate of 6.57% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value well above the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Hartford Financial Services (HIG)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave a comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Hartford Financial Services (HIG) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.