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URL:  http://boards.fool.com/acgl-a-case-study-on-security-analysis-part4-21258550.aspx

Subject:  ACGL : A case study on security analysis PART4 Date:  9/3/2004  10:01 AM
Author:  DCFNewbie Number:  32948 of 46904

This is the 4th part of a 5 segment piece on Arch Capital Group Holding Ltd. (ACGL), this time focusing on growth and risk.

Updated values and quick summary:

Framework structure:

1) Valuation

2) Operational Reality

3) Company History/Background

4) Operational Growth/Risk

5) Establishing Price Target and/or exit conditions


1) Valuation

Trailing P/E = 7.59
Trailing FCF/EV = 1.69

Analysts Growth Est. (5yr) = 20%
Past Growth (5yr) = 8.9%
Industry predicted growth (5yr) = 12.4%

Pondered growth average (20+8.9+10.95)/3 = 13.77% <- This one is the one I'll be using

We will try and justify how reasonable this growth is in section 4 - Operational growth and risk

FCF/EV/G = 0.12

2) Operational Reality

I will subdivide this section into:

(1)- Industry
(2)- Company operations
(2.1)- Small description
(2.2)- Management
(2.3)- Operational metrics
(2.4)- Company's equity makeup and balance sheet

This section's content can be found on a previous post:

http://boards.fool.com/Message.asp?mid=21234279

3) Company History/Background

This section's content can be found on a previous post:

http://boards.fool.com/Message.asp?mid=21243246

4) Operational Growth/Risk

This section focuses on the various risks and growth opportunities for both ACGL's business and the stockholders opportunity by itself. The risk section has a specific substructure:

(1)- Sector risks
(2)- Industry risks
(3)- Company operational risks:
(4)- Other risks

The structure is self-explanatory.

Moving on:

ACGL's growth perspectives are closely intertwined with its risks. The company presents a diversified array of adversities that may, in the future, significantly impact earnings and cash flow.

RISKS

Sector risks:
-Interest rates.

Industry risks:
-Cyclicity associated with the "soft" and "hard" markets of the insurance business.

Company operational risks:
-Natural catastrophes that offset the obtained balance between received premiums and claim payments.

Other risks:
-Abuse of voting and decision making privileges by the preferred shares stockholders.
-Abusive options issuing in favor of the preferred shares stockholders.

There are other "negligible" risks, described in detail in the company's 10-K. But those are associated more with lost of key operational