Intrinsic value of Atlantic American - AAME

Previous Close

$3.35

  Intrinsic Value

$5.38

stock screener

  Rating & Target

str. buy

+61%

  Value-price divergence*

-2%

Previous close

$3.35

 
Intrinsic value

$5.38

 
Up/down potential

+61%

 
Rating

str. buy

 
Value-price divergence*

-2%

Our model is not good at valuating stocks of financial companies, such as AAME.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of AAME stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  0.00
  4.80
  4.82
  4.84
  4.85
  4.87
  4.88
  4.89
  4.90
  4.91
  4.92
  4.93
  4.94
  4.94
  4.95
  4.95
  4.96
  4.96
  4.97
  4.97
  4.97
  4.98
  4.98
  4.98
  4.98
  4.98
  4.99
  4.99
  4.99
  4.99
  4.99
Revenue, $m
  0
  174
  182
  191
  200
  210
  220
  231
  243
  255
  267
  280
  294
  309
  324
  340
  357
  374
  393
  413
  433
  455
  477
  501
  526
  552
  580
  609
  639
  671
  704
Variable operating expenses, $m
 
  167
  175
  183
  192
  201
  211
  222
  232
  244
  256
  268
  282
  296
  310
  326
  342
  359
  377
  395
  415
  436
  457
  480
  504
  529
  555
  583
  612
  643
  675
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  161
  167
  175
  183
  192
  201
  211
  222
  232
  244
  256
  268
  282
  296
  310
  326
  342
  359
  377
  395
  415
  436
  457
  480
  504
  529
  555
  583
  612
  643
  675
Operating income, $m
  5
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
EBITDA, $m
  18
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  27
  28
  29
  31
Interest expense (income), $m
  2
  2
  3
  3
  4
  5
  5
  6
  7
  8
  9
  10
  11
  12
  13
  14
  15
  16
  18
  19
  21
  22
  24
  26
  27
  29
  31
  33
  36
  38
  40
Earnings before tax, $m
  4
  5
  5
  5
  4
  4
  4
  4
  3
  3
  2
  2
  2
  1
  1
  0
  0
  -1
  -1
  -2
  -3
  -3
  -4
  -5
  -5
  -6
  -7
  -8
  -9
  -10
  -11
Tax expense, $m
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  3
  4
  4
  3
  3
  3
  3
  3
  2
  2
  2
  2
  1
  1
  1
  0
  0
  -1
  -1
  -2
  -3
  -3
  -4
  -5
  -5
  -6
  -7
  -8
  -9
  -10
  -11

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  319
  335
  351
  368
  385
  404
  424
  445
  467
  489
  514
  539
  566
  593
  623
  654
  686
  720
  756
  793
  833
  874
  918
  964
  1,012
  1,062
  1,115
  1,171
  1,229
  1,290
  1,355
Adjusted assets (=assets-cash), $m
  319
  335
  351
  368
  385
  404
  424
  445
  467
  489
  514
  539
  566
  593
  623
  654
  686
  720
  756
  793
  833
  874
  918
  964
  1,012
  1,062
  1,115
  1,171
  1,229
  1,290
  1,355
Revenue / Adjusted assets
  0.000
  0.519
  0.519
  0.519
  0.519
  0.520
  0.519
  0.519
  0.520
  0.521
  0.519
  0.519
  0.519
  0.521
  0.520
  0.520
  0.520
  0.519
  0.520
  0.521
  0.520
  0.521
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
Average production assets, $m
  3
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  9
  10
  10
  11
  12
  12
  13
Working capital, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total debt, $m
  34
  44
  55
  67
  79
  91
  104
  118
  133
  148
  164
  181
  199
  217
  237
  258
  279
  302
  326
  351
  377
  405
  434
  465
  497
  530
  566
  603
  642
  683
  726
Total liabilities, $m
  213
  223
  234
  246
  258
  270
  283
  297
  312
  327
  343
  360
  378
  396
  416
  437
  458
  481
  505
  530
  556
  584
  613
  644
  676
  709
  745
  782
  821
  862
  905
Total equity, $m
  106
  111
  116
  122
  128
  134
  141
  148
  155
  163
  171
  179
  188
  197
  207
  217
  228
  239
  251
  263
  277
  290
  305
  320
  336
  353
  370
  389
  408
  428
  450
Total liabilities and equity, $m
  319
  334
  350
  368
  386
  404
  424
  445
  467
  490
  514
  539
  566
  593
  623
  654
  686
  720
  756
  793
  833
  874
  918
  964
  1,012
  1,062
  1,115
  1,171
  1,229
  1,290
  1,355
Debt-to-equity ratio
  0.321
  0.400
  0.470
  0.550
  0.610
  0.680
  0.740
  0.800
  0.860
  0.910
  0.960
  1.010
  1.060
  1.100
  1.150
  1.190
  1.230
  1.260
  1.300
  1.330
  1.360
  1.400
  1.420
  1.450
  1.480
  1.500
  1.530
  1.550
  1.570
  1.590
  1.610
Adjusted equity ratio
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332
  0.332

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3
  4
  4
  3
  3
  3
  3
  3
  2
  2
  2
  2
  1
  1
  1
  0
  0
  -1
  -1
  -2
  -3
  -3
  -4
  -5
  -5
  -6
  -7
  -8
  -9
  -10
  -11
Depreciation, amort., depletion, $m
  13
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
Funds from operations, $m
  -14
  4
  4
  4
  4
  3
  3
  3
  3
  3
  2
  2
  2
  1
  1
  1
  0
  0
  -1
  -1
  -2
  -2
  -3
  -4
  -4
  -5
  -6
  -7
  -8
  -8
  -9
Change in working capital, $m
  -15
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from operations, $m
  1
  4
  4
  4
  4
  3
  3
  3
  3
  3
  2
  2
  2
  1
  1
  1
  0
  0
  -1
  -1
  -2
  -2
  -3
  -4
  -4
  -5
  -6
  -7
  -8
  -8
  -9
Maintenance CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
New CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
Cash from investing activities, $m
  -2
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
Free cash flow, $m
  -1
  4
  4
  3
  3
  3
  3
  2
  2
  2
  2
  1
  1
  1
  0
  0
  0
  -1
  -2
  -2
  -3
  -4
  -4
  -5
  -6
  -7
  -7
  -8
  -9
  -10
  -11
Issuance/(repayment) of debt, $m
  0
  10
  11
  11
  12
  13
  13
  14
  15
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  31
  32
  34
  35
  37
  39
  41
  43
Issuance/(repurchase) of shares, $m
  -1
  1
  2
  2
  3
  3
  4
  4
  5
  6
  6
  7
  8
  8
  9
  10
  11
  12
  13
  14
  16
  17
  18
  20
  21
  23
  25
  26
  28
  30
  32
Cash from financing (excl. dividends), $m  
  0
  11
  13
  13
  15
  16
  17
  18
  20
  21
  22
  24
  26
  27
  29
  31
  33
  35
  37
  39
  42
  45
  47
  51
  53
  57
  60
  63
  67
  71
  75
Total cash flow (excl. dividends), $m
  -1
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  31
  32
  34
  35
  37
  39
  41
  43
  45
  48
  50
  53
  55
  58
  61
  64
Retained Cash Flow (-), $m
  -4
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -13
  -14
  -16
  -17
  -18
  -20
  -21
  -23
  -25
  -26
  -28
  -30
  -32
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  18
  19
  20
  21
  22
  22
  23
  24
  24
  25
  26
  26
  27
  28
  29
  30
  31
  32
Discount rate, %
 
  4.80
  5.04
  5.29
  5.56
  5.83
  6.13
  6.43
  6.75
  7.09
  7.45
  7.82
  8.21
  8.62
  9.05
  9.50
  9.98
  10.48
  11.00
  11.55
  12.13
  12.74
  13.37
  14.04
  14.74
  15.48
  16.25
  17.07
  17.92
  18.82
  19.76
PV of cash for distribution, $m
 
  10
  10
  10
  9
  9
  9
  9
  9
  8
  8
  7
  7
  6
  6
  5
  5
  4
  3
  3
  2
  2
  2
  1
  1
  1
  1
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  98.4
  96.3
  93.8
  91.0
  87.9
  84.6
  81.1
  77.4
  73.6
  69.8
  66.0
  62.3
  58.5
  54.9
  51.3
  47.9
  44.5
  41.2
  38.1
  35.1
  32.3
  29.6
  27.1
  24.8
  22.6
  20.5
  18.7
  16.9
  15.3
  13.8

Atlantic American Corporation, through its subsidiaries, provides life and health, and property and casualty insurance products in the United States. Its property and casualty insurance products include business automobile insurance coverage for state governments, local municipalities, and other motor pools and fleets; and business personal property, inland marine, and general liability products. The company also offers surety bond coverage for school bus transportation and subdivision construction, as well as performance and payment bonds. In addition, it provides life and supplemental health products, including ordinary and term life insurance, Medicare supplement, and other accident and health insurance products. The company markets its products through independent agents, broker-agents, and special market agents. Atlantic American Corporation was founded in 1968 and is based in Atlanta, Georgia.

FINANCIAL RATIOS  of  Atlantic American (AAME)

Valuation Ratios
P/E Ratio 22.8
Price to Sales 0.4
Price to Book 0.6
Price to Tangible Book
Price to Cash Flow 68.5
Price to Free Cash Flow 68.5
Growth Rates
Sales Growth Rate 0%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate NaN%
Cap. Spend. - 3 Yr. Gr. Rate -100%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 32.1%
Total Debt to Equity 32.1%
Interest Coverage 3
Management Effectiveness
Return On Assets 1.4%
Ret/ On Assets - 3 Yr. Avg. 1.6%
Return On Total Capital 2.2%
Ret/ On T. Cap. - 3 Yr. Avg. 2.7%
Return On Equity 2.9%
Return On Equity - 3 Yr. Avg. 3.6%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 11.4%
EBITDA Margin - 3 Yr. Avg. 11.2%
Operating Margin 3%
Oper. Margin - 3 Yr. Avg. 3.6%
Pre-Tax Margin 2.4%
Pre-Tax Margin - 3 Yr. Avg. 3%
Net Profit Margin 1.8%
Net Profit Margin - 3 Yr. Avg. 2.2%
Effective Tax Rate 25%
Eff/ Tax Rate - 3 Yr. Avg. 26.1%
Payout Ratio 33.3%

AAME stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AAME stock intrinsic value calculation we used $166 million for the last fiscal year's total revenue generated by Atlantic American. The default revenue input number comes from 2016 income statement of Atlantic American. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AAME stock valuation model: a) initial revenue growth rate of 4.8% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.8%, whose default value for AAME is calculated based on our internal credit rating of Atlantic American, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Atlantic American.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AAME stock the variable cost ratio is equal to 95.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for AAME stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.9% for Atlantic American.

Corporate tax rate of 27% is the nominal tax rate for Atlantic American. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AAME stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AAME are equal to 1.8%.

Life of production assets of 10 years is the average useful life of capital assets used in Atlantic American operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AAME is equal to 0%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $106 million for Atlantic American - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 19.651 million for Atlantic American is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Atlantic American at the current share price and the inputted number of shares is $0.1 billion.

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COMPANY NEWS

▶ Atlantic American posts 2Q profit   [Aug-14-17 11:23PM  Associated Press]
▶ Atlantic American reports 1Q loss   [May-12-17 03:06PM  Associated Press]
▶ Atlantic American posts 4Q profit   [Mar-15-17 01:30PM  Associated Press]
▶ 6 Stocks With Strong Yields but Falling Prices   [Feb-17-17 04:06PM  GuruFocus.com]
▶ 8 High-Yield Stocks With a Negative 1-Year Performance   [Feb-09-17 02:14PM  GuruFocus.com]
▶ 10-Q for Atlantic American Corp.   [Aug-14  08:10PM  at Company Spotlight]
▶ 10-Q for Atlantic American Corp.   [May-15  08:09PM  at Company Spotlight]
▶ 10-K for Atlantic American Corp.   [Apr-29  08:15PM  at Company Spotlight]
▶ 10-Q for Atlantic American Corp.   [Nov-14  07:09PM  Company Spotlight]
▶ Special Cash Dividend Declared by Atlantic American   [Oct-30  09:23AM  GlobeNewswire]
▶ Atlantic American Reports Increased Operating Income   [Aug-11  09:57AM  GlobeNewswire]
▶ 5 Keys To Spotting Value Stocks   [Jun-03  09:22AM  Benzinga]
▶ Atlantic American Reports First Quarter Results   [May-12  10:06AM  GlobeNewswire]
Stock chart of AAME Financial statements of AAME
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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