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Company earnings are very closely followed by many investors. Discounted earnings model is a popular model to estimate the worth of the company. The amount of future earnings from the business is estimated for each forecasted period and discounted at the appropriate discount rate to determine their present value. The present value of each period of estimated earnings for all future years are then added to determine the total present value.

The last step determines the perpetual value. It's the residual value of the business at the end of the period of years being estimated. This value is discounted to its equivalent present value and added to the present value of the future earnings to determine total intrinsic value. Some investors like adding the book value to this number; we intentionally eliminated the book value, as we are trying to evaluate finance companies based on earnings power. The model is commonly used to price IPOs and to evaluate companies' worth in a M&A scenario.

A rule of thumb for stock valuation that is popular on Wall Street is to calculate the sum of the expected growth rate of a stock's earnings plus its dividend yield and divide this by its P-E ratio. The higher the ratio, the better, and the famed money manager Peter Lynch recommends investors select stocks with a ratio of 2 or higher and to avoid stocks with a ratio less than 1.

The following is the list of attractive financial sector companies in S&P500 valued on both the above criteria.

*We assumed a discount rate of 12% and the growth will stabilize after the next 5 years and enter a constant phase.

Lincoln National Corp (NYSE:LNC): Lincoln National Corporation and its subsidiaries engage in multiple insurance and retirement businesses in the United States. It sells a range of wealth protection, accumulation, and retirement income products and solutions. LNC has a Return on Assets (ROA) of 0.4% and a Return on Equity (ROE) of 6.9%. The company is trading with a Return on Invested Capital (NASDAQ:ROIC) of 4.7%. The stock is expected to grow at 8.74 % over the next 5 years. LNC is expected to earn $4.36 per share next year. The company is valued at $48.6 using the Discount Earnings Model (NYSEARCA:DEM).The company has a sum of growth and yield to PE ratio (GY2PE) of 1.68. LNC is currently trading at $24.00, raising $3.8 or 19% this year.

Hartford Finl Services Group (NYSE:HIG): The Hartford Financial Services Group, Inc. together with its subsidiaries provides insurance and financial services in the United States and internationally. The Company maintains a retail mutual fund operation, whereby the Company, through wholly-owned subsidiaries, provides investment management and administrative services. The stock has a ROA of 0.4% and a ROE of 6.7%. The company is trading with a ROIC of 4.8%. HIG is expected to grow at 7.01 % over the next 5 years. The company is expected to earn $3.69 per share next year. The stock is valued at $39.6 using the DEM. The company has a GY2PE of 1.50. HIG is currently trading at $20.96, raising $4.1 or 25% this year.

AFLAC Inc (NYSE:AFL): Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company offers various voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities. AFL has a ROA of 2.5% and a ROE of 24.1%. AFL is trading with a ROIC of 18.2%. The company is expected to grow at 9.94 % over the next 5 years. The company is expected to earn $7.09 per share next year. The company is valued at $81.2 using the DEM.The company has a GY2PE of 1.80. AFL is currently trading at $47.91, raising $3 or 6.8% this year.

Unum Group (NYSE:UNM): Unum Group and its subsidiaries provide group and individual disability insurance products primarily in the United States and the United Kingdom. Unum also provides other insurance products, including employer-and employee-paid group benefits, life insurance, long-term care insurance and related services. The stock has a ROA of 1.6% and a ROE of 10.2%. The company is trading with a ROIC of 7.8%. The company is expected to grow at 9.45 % over the next 5 years. The stock is expected to earn $3.48 per share next year. The company is valued at $39.3 using the DEM. The company has a GY2PE of 1.59. UNM is currently trading at $23.35, raising $1.8 or 8.5% this year.

Metlife Inc (NYSE:MET): MetLife, Inc. is a provider of insurance and other financial services. MetLife is among the largest global providers of insurance, annuities, and employee benefit programs, with 90 million customers in the United States, Japan, Latin America, Asia Pacific, Europe and the Middle East. The company has a ROA of 0.4% and a ROE of 6.5%. The company is trading with a ROIC of 3.8%. MET is expected to grow at 8.55 % over the next 5 years. The stock is expected to earn $5.59 per share next year. MET is valued at $62.0 using the DEM.The company has a GY2PE of 1.44. MET is currently trading at $38.73, raising $6.7 or 21% this year.

Citigroup Inc (NYSE:C): Citigroup Inc., a global financial services company, provides consumers, corporations, governments, and institutions with a range of financial products and services. Citi has approximately 200 million customer accounts and operates in approximately 160 countries. The stock has a ROA of 0.6% and a ROE of 6.7%. The stock is trading with a ROIC of 1.8%. C is expected to grow at 8.45 % over the next 5 years. C is expected to earn $4.70 per share next year. The stock is valued at $51.8 using the DEM. The company has a GY2PE of 1.12. C is currently trading at $33.36, raising $5 or 18% this year.

Source: 6 Financial Stocks Discounted For 2012