Insurance Stocks

Stewart Information Services Corp Valuation – Initial Coverage $STC

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  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 or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  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 stock analysis showing a specific look at how Stewart Information Services Corp (STC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Stewart Information Services Corporation is a global real estate services company. The Company is engaged in offering products and services through its direct operations, network of Stewart Trusted Providers and family of companies. The Company operates through three segments: title insurance and related services, mortgage services and corporate. Title insurance and related services (title) segment includes the functions of searching, examining, closing and insuring the condition of the title to real property. The Company’s mortgage services segment includes a diverse set of products and services provided to enhance the mortgage and real estate markets. Its services ranges from residential and commercial title insurance, and closing and settlement services to specialized offerings for the mortgage industry. The Company provides its services to homebuyers and sellers, residential and commercial real estate professionals, and mortgage lenders and servicers, among others.

STC Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of STC – February 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $1,049,817,822 Fail
2. Earnings Stability Positive EPS for 10 years prior Fail
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -123.24% Fail
5. Moderate PEmg Ratio PEmg < 20 28.37 Fail
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.64 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Fail
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

EPSmg $1.58
MG Growth Estimate -2.13%
MG Value $6.70
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $22.91
MG Value based on 0% Growth $13.43
Market Implied Growth Rate 9.93%
Current Price $44.82
% of Intrinsic Value 668.69%

Stewart Information Services Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability or growth over the last ten years, and the high PEmg ratio. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.84 in 2013 to an estimated $1.58 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 9.93% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Stewart Information Services Corp revealed the company was trading above its Graham Number of $37.58. The company pays a dividend of $1.2 per share, for a yield of 2.7%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 28.37, which was above the industry average of 18.78.

Stewart Information Services Corp scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Graham Number $37.58
PEmg 28.37
PB Ratio 1.64
Dividend Yield 2.68%
TTM Dividend $1.20
Number of Consecutive Years of Dividend Growth 3

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Long-Term Debt & Capital Lease Obligation $106,808,000
Total Assets $1,341,724,000
Intangible Assets $227,984,000
Total Liabilities $700,524,000
Shares Outstanding (Diluted Average) 23,492,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.40
Dec2016 $1.85
Dec2015 -$0.26
Dec2014 $1.24
Dec2013 $2.60
Dec2012 $4.61
Dec2011 $0.12
Dec2010 -$0.69
Dec2009 -$2.80
Dec2008 -$13.68
Dec2007 -$2.21
Dec2006 $2.36
Dec2005 $4.86
Dec2004 $4.53
Dec2003 $6.88
Dec2002 $5.43
Dec2001 $2.98
Dec2000 $0.04
Dec1999 $1.95
Dec1998 $3.32
Dec1997 $1.11

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.58
Dec2016 $1.45
Dec2015 $1.39
Dec2014 $2.00
Dec2013 $1.84
Dec2012 $0.15
Dec2011 -$2.68
Dec2010 -$3.85
Dec2009 -$4.38
Dec2008 -$3.73
Dec2007 $1.93
Dec2006 $4.27
Dec2005 $5.13
Dec2004 $4.83
Dec2003 $4.47
Dec2002 $3.09
Dec2001 $1.91

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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