AmTrust Financial Services: Undervalued And Overly Shorted

| About: AmTrust Financial (AFSI)

Description of Company

AmTrust Financial Services, Inc. (NASDAQ:AFSI) underwrites and provides property and casualty insurance in both domestic and international markets. AFSI serves four primary segments: small commercial business, specialty risk and extended warranty, specialty program business, and personal lines reinsurance.

Current News and Short Interest

As of late, AFSI seems to be the most hated stock in the Property & Casualty Insurance Sector with a Short Float of 31.72%. Recent articles discussed the possibility of accounting inconsistencies, and at the time of the release of that article, the stock price tanked. Following that article, AFSI responded via conference call to recent stock activity and claims by short-sellers. This article does not have a dog in this particular fight as to which party is more factual than the other. I must rely on the financial history and performance of the company relative to its competitors, and then determine whether or not AFSI has a stock value that is worth buying or not.

The Blip on the Radar

AFSI got on my radar by having the following criteria. First, sales growth for the past five years was 26.50%. Second, EPS Growth for the past five years was 11.60%, while expected EPS growth for the next five years is increasing at a growth pace of 15.00%. Third, AFSI has a PEG ratio of 0.62. Putting all of these factors together, while not conclusive, is enough to get my attention with the thesis that the company financials are heading in the right direction, and it might be undervalued, thus warranting a deeper dive into the numbers.

Here is what I see regarding AFSI compared to the industry:

How AFSI Performs Compared to the Industry

Investment Returns



Return on Equity



Return on Assets



Return on Capital



Return on Equity (5Y Average)



Return on Assets (5Y Average)



Return on Capital (5Y Average)



AFSI Management Ratio Compared to Industry

Management Efficiency



Income per Employee



Revenue per Employee



Asset Turnover



AFSI Growth Rates Compared to Industry

Growth Rates



Net Income (5Y Annual Average)



Dividends (5Y Annual Average)



Price to Free Cash Flow



Relative Value of AFSI

So the numbers are telling me that AFSI is outperforming the industry on many different metrics, but now I need to know if AFSI is currently undervalued or overvalued relative to its fair market value. I will try to keep fair market value estimates simple by utilizing a discounted cash flow model using the last 12 months of earnings, combined with the expected EPS growth rate for the next five years, and factoring it against a 10% discount rate. Using these figures, AFSI should be fairly valued at $64.48.

As of the writing of this article, AFSI is currently trading at $33.03, a 48.77% discount to the calculated fair market value. This significant discount to the fair market value of the earnings far exceeds my usual 20% discount I seek. AFSI is worth considering, and based on current financials, there is a bullish case for AFSI until it reaches a fair market value range of $62.83 to $66.12.

Some Considerations

1. The short sellers do not need to tell us how much they are shorting like those who are long with significant positions. The bulls may be trying to catch a falling knife.

2. The short seller allegations could turn out to be true. If so, the bulls will be left holding the bag.

3. Earnings will be coming out for AFSI in the next few weeks, and this upcoming earnings announcement could yield more positive or negative information making the stock price more volatile than ever.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.