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. 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. 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. 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 to get a sense of whether the company is a good investment. In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. 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. 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 specific look at how The Travelers Companies fares in the ModernGraham valuation model.
TRV data by YCharts
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 - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - 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 - PASS
- Moderate PEmg ratio - PEmg is less than 20 - 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
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$99.12|
|Value Based on 0% Growth||$58.11|
|Market Implied Growth Rate||1.81%|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
TRV Dividend data by YCharts
Travelers fares very well in the ModernGraham approach, having passed all of the requirements of both the Defensive Investor and the Enterprising Investor. The intrinsic value has improved from $85.91 in our last valuation of the company to $96.30, largely due to earnings figures that were better than I anticipated (side note: this is a great benefit of basing valuations on the low estimates - it is better to have guessed low than guess high). As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should feel very comfortable proceeding with further research. Research should include a review of some other companies, such as through a review of ModernGraham's valuation of Ace Limited (ACE), or ModernGraham's valuation of AFLAC (AFL). From a valuation perspective, the company has improved its EPSmg (normalized earnings) from $5.11 in 2008 to $6.84 for 2013. This is a solid level of growth that supports the market's current implied growth estimate of 1.81%. As a result, the company appears to be fairly valued at the present time.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Travelers Companies? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Travelers Comopanies (TRV) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.