Allstate Corporation (NYSE:ALL) presents an intriguing investment possibility for value investors as the company has blown away the earnings estimates multiple times in recent years. Benjamin Graham, the father of value investing, taught that looking at the price cannot be the sole factor in investment decisions as the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is an updated look at how the company fares in the ModernGraham valuation model.
The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.
In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved 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.
Defensive Investor - must pass all 6 of the following tests: Score = 4/6
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- 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 - FAIL
- Moderate PEmg (price over normalized earnings) 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
Valuation Summary
Key Data:
Recent Price | $69.79 |
MG Value | $163.98 |
MG Opinion | Undervalued |
Value Based on 3% Growth | $61.76 |
Value Based on 0% Growth | $36.20 |
Market Implied Growth Rate | 3.94% |
PEmg | 16.39 |
PB Ratio | 1.35 |
Balance Sheet - September 2014
Total Debt | $5,195,000,000 |
Total Assets | $108,310,000,000 |
Intangible Assets | $1,219,000,000 |
Total Liabilities | $85,981,000,000 |
Outstanding Shares | 431,200,000 |
Earnings Per Share
2014 (estimate) | $5.18 |
2013 | $4.81 |
2012 | $4.68 |
2011 | $1.50 |
2010 | $1.71 |
2009 | $1.58 |
2008 | -$3.06 |
2007 | $7.77 |
2006 | $7.84 |
2005 | $2.64 |
2004 | $4.54 |
Earnings Per Share - ModernGraham
2014 (estimate) | $4.26 |
2013 | $3.48 |
2012 | $2.31 |
2011 | $1.38 |
2010 | $1.94 |
2009 | $2.49 |
Dividend History
ALL Dividend data by YCharts
Conclusion:
Allstate Corporation passes the initial requirements of the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the insufficient earnings growth or stability over the last ten years while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
When it comes to that valuation, it is critical to consider the company's earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.97 in 2010 to an estimated $4.26 for 2014. This is a very strong level of demonstrated growth, which is well above the market's implied estimate for earnings growth of only 3.94% over the next 7-10 years. In fact, the historical growth is around 24% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.
Be sure to check out previous ModernGraham valuations of Allstate Corporation for a greater perspective!