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 whittle 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 Ace Limited (ACE)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): ACE Limited (ACE) operates as an insurance and reinsurance company. The Company offers commercial insurance products and service offerings, such as risk management programs, loss control and engineering and complex claims management. It provides specialized insurance products ranging from Directors & Officers (D&O) and professional liability to various specialty-casualty and umbrella and excess casualty lines to niche areas, such as aviation and energy. It also offers personal lines insurance coverage, including homeowners, automobile, valuables, umbrella liability, and recreational marine products. In addition, the Company supplies personal accident, supplemental health, and life insurance to individuals in select countries. During 2013, the Company acquired Fianzas Monterrey and ABA Seguros. The Company operates through five business segments: Insurance â€“ North American P&C; Insurance â€“ North American Agriculture; Insurance â€“ Overseas General; Global Reinsurance; and Life.
Defensive Investor – must pass all 6 of the following tests: Score = 6/6
- 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 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 PASS
- 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 – PASS
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3
- 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 – PASS
|Value Based on 3% Growth||$127.20|
|Value Based on 0% Growth||$74.57|
|Market Implied Growth Rate||1.92%|
Balance Sheet -Â March 2015
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Ace LimitedÂ qualifies for both the Defensive Investor and the Enterprising Investor. Â The company passes all of the requirements of both investor types, a rare accomplishment. Â As a result, all value 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 As for a valuation,Â theÂ company appears undervalued after growing its EPSmg (normalized earnings) from $6.42 in 2011 to an estimated $8.77 for 2015. Â This level of demonstrated growth outpaces the market’s implied estimate of 1.92% earnings growth and leads theÂ ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ 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 Ace Limited (ACE)? 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.
Disclaimer: Â The author did not hold aÂ position in any of the companies listed 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 the Wikipedia; this article is not affiliated with the company in any manner.