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URL:  http://boards.fool.com/acgl-a-case-study-on-security-analysis-part5-21268285.aspx

Subject:  ACGL : A case study on security analysis PART5 Date:  9/6/2004  5:23 AM
Author:  DCFNewbie Number:  32980 of 46903

Hi everyone,

This is the 5th and FINAL section (Yey!!!) of a 5 segment piece on Arch Capital Group Holding Ltd. (ACGL), in this case devoted to price targets and exit conditions.

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's content can be found on a previous post:

http://boards.fool.com/Message.asp?mid=21258550

5) Establishing Price Target and/or exit conditions


I will opt for several price target formulas:

Industry P/E - At what price would the company have a P/E equal to the industry average
Industry P/BV - At what price would the company have a P/BV equal to the industry average
Industry PEG - At what price would the company have a PEG equal to the industry average (using growth rate determined in the "Valuation" section)
DCF with CAPM - Discount cash flow price target assuming a discount rate calculated through CAPM using a predicted future beta, a pre-determined 5 year growth rate and a 0% growth rate after that.

Current Price (by market close 2004-08-27) - $36.13

Industry P/BV - $36.82
Industry P/E - $60.17
Industry PEG - $64.2
DCF with CAPM - $164.90

I will take this opportunity to comment on the analysts covering ACGL.
Analyst coverage is a good sample on how the investment community looks at ACGL.
Of the 10 analysts covering it there is a high degree of polarization. 5 are issuing Strong Buy orders, 4 are issuing Hold orders (1 is issuing a Buy). Essentially, this can be interpreted has there being 2 opinions regarding ACGL's valuation:

The first opinion is that ACGL should be valued in accordance to the industry average P/B (both are currently at 1.3) there by making the current price a fair valued assessment of ACGL's intrinsic value.