Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. 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 companyÂ or by reviewing theÂ 5 Undervalued Companies to Research for the Defensive Investor -Â October 2014.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 Principal Financial Group Inc. (PFG)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Principal Financial Group, Inc. (PFG) is a provider of retirement savings, investment and insurance products and services. As of December 31, 2011, the Company had approximately 18 million customers. PFGâ€™s United States and international operations concentrate primarily on asset accumulation and asset management. PFG offers a range of individual and group life insurance, individual and group disability insurance, and group dental and vision insurance. It focuses on small and medium-sized businesses providing an array of retirement and employee benefit solutions. The Company operates in four segments: retirement and investor services, principal global investors, principal international, and United States insurance solutions. PFGâ€™s corporate segment consists of the assets and activities that have not been allocated to any other segment. As of December 31, 2011, it owned 26 properties in Des Moines, Iowa, and in various other locations. In February 2013, it acquired AFP Cuprum S.A.
Defensive Investor – must pass all 6 of the following tests: Score = 5/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â 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 -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score =Â 3/3
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$44.99|
|Value Based on 0% Growth||$26.37|
|Market Implied Growth Rate||4.17%|
Balance Sheet – SeptemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Principal Financial Group qualifies for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor is turned off by the level of earnings growth over the last ten years, while the Enterprising Investor has no initial concerns. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. Â From a valuation side of things, the company appears to be fairly valuedÂ after growingÂ its EPSmg (normalized earnings) from $2.16 in 2010 to an estimated $3.10 for 2014. Â This level of demonstrated growth supportsÂ the market’s implied estimate ofÂ 4.17%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative toÂ the price.
Be sure to check out previous ModernGraham valuations of Principal Financial Group (PFG)Â for better perspective!
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 Principal Financial Group (PFG)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Principal Financial Group (PFG)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.