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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. 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 XL Group fares in the ModernGraham valuation model.

XL Chart

XL data by YCharts

Defensive Investor - must pass all 6 of the following tests: Score = 4/6

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  3. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  4. 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 - FAIL
  5. Moderate PEmg ratio - PEmg is less than 20 - PASS
  6. 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 = 2/3

  1. Earnings Stability - positive earnings per share for at least 5 years - FAIL
  2. Dividend Record - currently pays a dividend - PASS
  3. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$30.23
MG Value$66.89
MG OpinionUndervalued
Value Based on 3% Growth$25.19
Value Based on 0% Growth$14.77
Market Implied Growth Rate4.45%
PEmg17.40
PB Ratio0.84

Balance Sheet - 12/31/2013

Total Debt$2,263,200,000
Total Assets$45,652,900,000
Intangible Assets$411,600,000
Total Liabilities$35,655,300,000
Outstanding Shares278,250,000

Earnings Per Share

2013$3.63
2012$2.10
2011-$1.52
2010$1.73
2009$0.61
2008-$11.02
2007$1.15
2006$9.60
2005-$9.14
2004$8.13

Earnings Per Share - ModernGraham

2013$1.74
2012-$0.01
2011-$1.32
2010-$0.67
2009-$1.83
2008-$2.12

Dividend History

XL Dividend Chart

XL Dividend data by YCharts

Conclusion:

XL Group does not qualify for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company's failings are the lack of earnings stability over the ten year period and the lack of earnings growth over the ten year period. For the Enterprising Investor, the problem is the lack of earnings stability over the five year period. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities through a review of ModernGraham's valuation of Travelers Companies (NYSE:TRV) and ModernGraham's valuation of Aflac Inc. (NYSE:AFL).

As for a valuation, the company does appear to be undervalued currently, having grown its EPSmg (normalized earnings) from -$1.83 in 2009 to $1.74 for 2013. This demonstrated level of growth surpasses the market's implied estimate of 4.45% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.

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 XL Group (NYSE:XL)? 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 XL Group (XL) 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.

Source: ModernGraham Annual Valuation Of XL Group PLC - 2014