Hanover Insurance Group Valuation – Initial Coverage $THG

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 Undervalued Stocks for the Enterprising Investor – August 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 Hanover Insurance Group (THG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Hanover Insurance Group, Inc. is a holding company. The Company is engaged in providing property and casualty insurance products and services. The Company has four segments: Commercial Lines, Personal Lines, Chaucer and Other. It markets its domestic products and services through independent agents and brokers in the United States, and conducts business internationally through a subsidiary, Chaucer Holdings Limited, which operates through the Society and Corporation of Lloyd’s (Lloyd’s). Its Commercial Lines product suite provides agents and customers with products designed for small, middle and specialized markets. Its Personal Lines coverages include other personal lines, which consist of umbrella and fire, among others. The Chaucer segment consists of international business written through Lloyd’s, including marine and aviation, and property. The Other segment consists of Opus Investment Management, Inc. (Opus), which provides investment advisory services to affiliates.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of THG – September 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 $4,147,156,915 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
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 114.34% Pass
5. Moderate PEmg Ratio PEmg < 20 18.07 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.41 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 Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $5.41
MG Growth Estimate 11.59%
MG Value $171.53
Opinion Undervalued
MG Grade C+
MG Value based on 3% Growth $78.50
MG Value based on 0% Growth $46.02
Market Implied Growth Rate 4.79%
Current Price $97.85
% of Intrinsic Value 57.05%

Hanover Insurance Group Inc qualifies for both the Defensive Investor and the Enterprising Investor.  In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position . The Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $3.05 in 2013 to an estimated $5.41 for 2017.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.79% 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 above the price.

At the time of valuation, further research into Hanover Insurance Group Inc revealed the company was trading above its Graham Number of $89.65.  The company pays a dividend of $1.88 per share, for a yield of 1.9%  Its PEmg (price over earnings per share – ModernGraham) was 18.07, which was below the industry average of 20.16, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Hanover Insurance Group Inc receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

Graham Number $89.65
PEmg 18.07
PB Ratio 1.41
Dividend Yield 1.92%
TTM Dividend $1.88
Number of Consecutive Years of Dividend Growth 12


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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2017
Long-Term Debt & Capital Lease Obligation $786,700,000
Total Assets $14,792,700,000
Intangible Assets $185,200,000
Total Liabilities $11,820,200,000
Shares Outstanding (Diluted Average) 42,800,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $5.30
Dec2016 $3.59
Dec2015 $7.40
Dec2014 $6.28
Dec2013 $5.59
Dec2012 $1.23
Dec2011 $0.80
Dec2010 $3.34
Dec2009 $3.86
Dec2008 $0.40
Dec2007 $4.83
Dec2006 $3.27
Dec2005 -$6.08
Dec2004 $2.34
Dec2003 $1.64
Dec2002 -$5.79
Dec2001 -$0.06
Dec2000 $3.70
Dec1999 $5.33
Dec1998 $3.43
Dec1997 $3.82

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.41
Dec2016 $5.25
Dec2015 $5.48
Dec2014 $4.16
Dec2013 $3.05
Dec2012 $1.83
Dec2011 $2.30
Dec2010 $3.08
Dec2009 $2.39
Dec2008 $1.42
Dec2007 $1.69
Dec2006 -$0.23
Dec2005 -$1.85
Dec2004 $0.30
Dec2003 -$0.16
Dec2002 -$0.27
Dec2001 $2.75

Recommended Reading:

Other ModernGraham posts about the company

None.  This is the first time ModernGraham has covered the company. None.  This is the first time ModernGraham has covered the company.

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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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