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 10 Undervalued Stocks for the Enterprising Investor â€“ August 2017.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 stock analysis showing a specific look at how Hanover Insurance Group (THG)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ 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
|MG Growth Estimate||11.59%|
|MG Value based on 3% Growth||$78.50|
|MG Value based on 0% Growth||$46.02|
|Market Implied Growth Rate||4.79%|
|% of Intrinsic Value||57.05%|
Hanover Insurance Group Inc qualifies for both the Defensive Investor and the Enterprising Investor. Â 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. Â 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. Â This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.79% annual earnings growth over the next 7-10 years. Â 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. Â The company pays a dividend of $1.88 per share, for a yield of 1.9% Â 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
|Number of Consecutive Years of Dividend Growth||12|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2017|
|Long-Term Debt & Capital Lease Obligation||$786,700,000|
|Shares Outstanding (Diluted Average)||42,800,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$5.30|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$5.41|
Other ModernGraham posts about the company
None. Â This is the first time ModernGraham has covered the company. None. Â This is the first time ModernGraham has covered the company.
Other ModernGraham posts about related companies
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.
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