In analyzing Commerce Group Inc., I'll be introducting a new methodology I've adopted. I am inaugurating the use of a value screen format to simplify and standardize the presentation of investment research information. This screen, which is subject to fine tuning, is loosely based on the excellent question-and-answer methodology employed by ModernGraham.com , but uses somewhat different parameters which track my personal style of value investing.
Commerce Group Inc. (NYSE:CGI)
1) Does the stock’s dividend yield exceed the yield of the S&P 500? Yes - 3.39%.
2) Is the stock’s beta less than or equal to 1.00? Yes - .77
3) Has the stock’s performance equaled or exceeded the performance of the S&P? Yes - significantly
4) Is the size of firm over 1 billion market capitalization? Yes - 2B.
5) Price to earnings analysis - is the current P/E ratio below 20? Yes - 8.16.
6) Price to assets analysis - is the P/B ratio below 2.5? Yes - 1.35.
7) Strong financial condition - is the current ratio (current assets/current liabilities) greater than 2.0? No - .758. Note that the Altman Z-score is only 1.89.
8) Earnings stability - has there been positive net income for the prior ten years? Yes.
9) Earnings growth - are earnings for the company greater than five years ago, preferably at least 1/3 greater? Yes - more than double.
10) Dividend record - have there been consistent dividend payments over the past ten years? Yes.
11) Dividend growth - is the dividend greater than five years ago, preferably at least 1/3 greater? Yes, 58% greater, and there was a 2-for-1 split in June 2006.
12) Is the business simple and understandable? Yes. “The Commerce Group, Inc. and its subsidiaries provide personal and commercial property and casualty insurance in Massachusetts and, to a lesser extent, in other states. We market our products primarily through our network of independent agents. Our core product line is personal automobile insurance. We also write commercial automobile and homeowners insurance. We have been the largest writer of personal property and casualty insurance in Massachusetts in terms of direct written premium since 1990.”
13) Does the business have favorable long term prospects? Yes, except to the extent that high fuel costs might result in fewer cars on the road, and fewer miles per car; also, Massachusetts has a declining population trend.
14) Does management act in the best interest of shareholders? No information to judge otherwise.
15) Are company insiders buying more stock than they are selling? No. They have not bought any in the last two years, but they have sold ~21M each year.
SUMMARY: CGI stock looks cheap, but the low current ratio and Altman Z score suggest that the company is not financially strong. Insider selling is negative. The current price of 29.39 is much higher than the forward intrinsic value of approximately 21.25. This suggests overvaluation and downside risk. This is confirmed by an apparent head-and-shoulders top with negative on balance volume.
CGI 1-yr. chart: