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. 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. 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. 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 to get a sense of whether the company is a good investment. In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. 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. 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 specific look at how Cincinnati Financial Corp (CINF) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Cincinnati Financial Corporation is engaged in property casualty insurance marketed through independent insurance agents in 39 states. During the year ended December 31, 2012, the Company owned 100% of three subsidiaries: The Cincinnati Insurance Company, CSU Producer Resources Inc., and CFC Investment Company. The Company operates in five segments: Commercial lines property casualty insurance, Personal lines property casualty insurance, Excess and surplus lines property casualty insurance, Life insurance and Investments. Its standard market property casualty insurance group includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group writes a range of business, homeowner and auto policies.
Defensive Investor – must pass all 6 of the following tests: Score = 5/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- 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 – PASS
- 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 – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$33.77|
|Value Based on 0% Growth||$19.79|
|Market Implied Growth Rate||5.73%|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Cincinnati Financial Corp does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned by the lack of sufficient earnings growth over the last ten years, while the Enterprising Investor has an issue with the lack of earnings growth over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. From a valuation side of things, the company appears overvalued after seeing its EPSmg (normalized earnings) drop from $3.02 in 2010 to only an estimated $2.33 for 2014. This demonstrated drop in earnings does not support the market’s implied estimate of 5.73% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Cincinnati Financial Corp (CINF)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Cincinnati Financial Corp (CINF) 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.