Intrinsic value of Employers Holdings - EIG

Previous Close

$43.65

  Intrinsic Value

$118.62

stock screener

  Rating & Target

str. buy

+172%

Previous close

$43.65

 
Intrinsic value

$118.62

 
Up/down potential

+172%

 
Rating

str. buy

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

We calculate the intrinsic value of EIG 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

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

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, %
  3.72
  9.30
  8.87
  8.48
  8.13
  7.82
  7.54
  7.29
  7.06
  6.85
  6.67
  6.50
  6.35
  6.21
  6.09
  5.98
  5.89
  5.80
  5.72
  5.65
  5.58
  5.52
  5.47
  5.42
  5.38
  5.34
  5.31
  5.28
  5.25
  5.23
  5.20
Revenue, $m
  0
  853
  928
  1,007
  1,089
  1,174
  1,262
  1,354
  1,450
  1,549
  1,653
  1,760
  1,872
  1,988
  2,109
  2,235
  2,367
  2,504
  2,647
  2,797
  2,953
  3,116
  3,287
  3,465
  3,651
  3,846
  4,050
  4,264
  4,488
  4,723
  4,968
Variable operating expenses, $m
 
  736
  801
  869
  939
  1,012
  1,089
  1,168
  1,250
  1,335
  1,424
  1,513
  1,609
  1,709
  1,813
  1,921
  2,034
  2,152
  2,275
  2,404
  2,538
  2,678
  2,824
  2,978
  3,138
  3,305
  3,481
  3,665
  3,857
  4,059
  4,270
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
  638
  736
  801
  869
  939
  1,012
  1,089
  1,168
  1,250
  1,335
  1,424
  1,513
  1,609
  1,709
  1,813
  1,921
  2,034
  2,152
  2,275
  2,404
  2,538
  2,678
  2,824
  2,978
  3,138
  3,305
  3,481
  3,665
  3,857
  4,059
  4,270
Operating income, $m
  142
  116
  127
  138
  150
  161
  174
  187
  200
  214
  229
  247
  263
  280
  297
  314
  333
  352
  372
  393
  415
  438
  462
  487
  513
  541
  570
  600
  631
  664
  699
EBITDA, $m
  151
  124
  136
  147
  159
  171
  184
  198
  212
  226
  241
  257
  273
  290
  308
  326
  346
  366
  387
  408
  431
  455
  480
  506
  533
  562
  591
  623
  655
  690
  725
Interest expense (income), $m
  0
  1
  11
  20
  31
  42
  53
  64
  76
  89
  102
  116
  130
  144
  160
  176
  192
  209
  228
  246
  266
  286
  308
  330
  354
  378
  404
  431
  459
  488
  519
Earnings before tax, $m
  141
  115
  116
  118
  119
  120
  121
  122
  124
  125
  127
  132
  133
  135
  137
  139
  141
  143
  145
  147
  149
  152
  154
  157
  160
  163
  166
  169
  172
  176
  180
Tax expense, $m
  34
  31
  31
  32
  32
  32
  33
  33
  33
  34
  34
  36
  36
  36
  37
  37
  38
  39
  39
  40
  40
  41
  42
  42
  43
  44
  45
  46
  47
  48
  49
Net income, $m
  107
  84
  85
  86
  87
  88
  88
  89
  90
  91
  93
  96
  97
  99
  100
  101
  103
  104
  106
  107
  109
  111
  113
  115
  117
  119
  121
  123
  126
  128
  131

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
  3,773
  4,119
  4,484
  4,864
  5,260
  5,671
  6,099
  6,543
  7,005
  7,485
  7,984
  8,503
  9,043
  9,604
  10,190
  10,799
  11,435
  12,098
  12,789
  13,511
  14,266
  15,053
  15,877
  16,738
  17,639
  18,581
  19,568
  20,600
  21,682
  22,815
  24,002
Adjusted assets (=assets-cash), $m
  3,773
  4,119
  4,484
  4,864
  5,260
  5,671
  6,099
  6,543
  7,005
  7,485
  7,984
  8,503
  9,043
  9,604
  10,190
  10,799
  11,435
  12,098
  12,789
  13,511
  14,266
  15,053
  15,877
  16,738
  17,639
  18,581
  19,568
  20,600
  21,682
  22,815
  24,002
Revenue / Adjusted assets
  0.000
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
Average production assets, $m
  32
  35
  38
  41
  45
  48
  52
  56
  59
  64
  68
  72
  77
  82
  86
  92
  97
  103
  109
  115
  121
  128
  135
  142
  150
  158
  166
  175
  184
  194
  204
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
  32
  300
  584
  880
  1,187
  1,507
  1,839
  2,184
  2,543
  2,916
  3,303
  3,707
  4,126
  4,563
  5,017
  5,491
  5,985
  6,500
  7,037
  7,598
  8,184
  8,796
  9,436
  10,105
  10,805
  11,538
  12,304
  13,106
  13,947
  14,827
  15,749
Total liabilities, $m
  2,933
  3,200
  3,484
  3,780
  4,087
  4,407
  4,739
  5,084
  5,443
  5,816
  6,203
  6,607
  7,026
  7,463
  7,917
  8,391
  8,885
  9,400
  9,937
  10,498
  11,084
  11,696
  12,336
  13,005
  13,705
  14,438
  15,204
  16,006
  16,847
  17,727
  18,649
Total equity, $m
  841
  918
  1,000
  1,085
  1,173
  1,265
  1,360
  1,459
  1,562
  1,669
  1,780
  1,896
  2,016
  2,142
  2,272
  2,408
  2,550
  2,698
  2,852
  3,013
  3,181
  3,357
  3,541
  3,733
  3,933
  4,144
  4,364
  4,594
  4,835
  5,088
  5,352
Total liabilities and equity, $m
  3,774
  4,118
  4,484
  4,865
  5,260
  5,672
  6,099
  6,543
  7,005
  7,485
  7,983
  8,503
  9,042
  9,605
  10,189
  10,799
  11,435
  12,098
  12,789
  13,511
  14,265
  15,053
  15,877
  16,738
  17,638
  18,582
  19,568
  20,600
  21,682
  22,815
  24,001
Debt-to-equity ratio
  0.038
  0.330
  0.580
  0.810
  1.010
  1.190
  1.350
  1.500
  1.630
  1.750
  1.860
  1.950
  2.050
  2.130
  2.210
  2.280
  2.350
  2.410
  2.470
  2.520
  2.570
  2.620
  2.670
  2.710
  2.750
  2.780
  2.820
  2.850
  2.880
  2.910
  2.940
Adjusted equity ratio
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223
  0.223

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  107
  84
  85
  86
  87
  88
  88
  89
  90
  91
  93
  96
  97
  99
  100
  101
  103
  104
  106
  107
  109
  111
  113
  115
  117
  119
  121
  123
  126
  128
  131
Depreciation, amort., depletion, $m
  9
  8
  9
  9
  9
  10
  10
  11
  11
  12
  13
  9
  10
  11
  11
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  27
Funds from operations, $m
  91
  92
  94
  95
  96
  97
  99
  100
  102
  103
  105
  106
  108
  109
  111
  113
  115
  118
  120
  122
  125
  128
  130
  133
  136
  139
  143
  146
  150
  154
  158
Change in working capital, $m
  -32
  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
  123
  92
  94
  95
  96
  97
  99
  100
  102
  103
  105
  106
  108
  109
  111
  113
  115
  118
  120
  122
  125
  128
  130
  133
  136
  139
  143
  146
  150
  154
  158
Maintenance CAPEX, $m
  0
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -11
  -11
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
New CAPEX, $m
  -5
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
Cash from investing activities, $m
  -89
  -7
  -8
  -8
  -8
  -9
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -15
  -16
  -16
  -17
  -19
  -20
  -20
  -21
  -23
  -24
  -25
  -27
  -28
  -29
  -31
  -32
  -34
  -35
Free cash flow, $m
  34
  85
  86
  87
  87
  88
  89
  90
  91
  92
  92
  92
  93
  95
  96
  97
  98
  99
  101
  102
  103
  105
  107
  108
  110
  112
  114
  116
  118
  120
  122
Issuance/(repayment) of debt, $m
  0
  268
  284
  296
  307
  320
  332
  345
  359
  373
  388
  403
  419
  437
  455
  474
  494
  515
  537
  561
  586
  612
  640
  669
  700
  732
  766
  802
  840
  880
  922
Issuance/(repurchase) of shares, $m
  -21
  0
  0
  0
  2
  4
  7
  10
  13
  16
  19
  19
  23
  27
  31
  35
  39
  44
  49
  54
  59
  65
  71
  77
  84
  91
  99
  107
  115
  124
  134
Cash from financing (excl. dividends), $m  
  -12
  268
  284
  296
  309
  324
  339
  355
  372
  389
  407
  422
  442
  464
  486
  509
  533
  559
  586
  615
  645
  677
  711
  746
  784
  823
  865
  909
  955
  1,004
  1,056
Total cash flow (excl. dividends), $m
  23
  353
  370
  382
  396
  412
  428
  445
  462
  480
  499
  515
  536
  558
  581
  605
  631
  658
  687
  717
  749
  782
  817
  855
  894
  935
  979
  1,025
  1,074
  1,125
  1,178
Retained Cash Flow (-), $m
  -80
  -77
  -81
  -85
  -88
  -92
  -95
  -99
  -103
  -107
  -111
  -116
  -120
  -125
  -130
  -136
  -142
  -148
  -154
  -161
  -168
  -176
  -184
  -192
  -201
  -210
  -220
  -230
  -241
  -253
  -265
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
 
  276
  288
  297
  308
  320
  333
  346
  359
  373
  388
  399
  415
  432
  450
  469
  489
  510
  532
  556
  580
  606
  634
  663
  693
  725
  759
  795
  832
  872
  914
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  264
  264
  259
  254
  248
  241
  233
  224
  214
  203
  190
  177
  164
  151
  138
  124
  111
  98
  86
  74
  63
  53
  43
  35
  28
  22
  17
  13
  10
  7
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  99.9
  99.7
  99.4
  99.0
  98.5
  97.9
  97.3
  96.6
  95.9
  95.2
  94.4
  93.6
  92.7
  91.7
  90.8
  89.8
  88.8
  87.7
  86.6
  85.5
  84.4
  83.3
  82.1
  80.9
  79.7
  78.6
  77.4

Employers Holdings, Inc. is a holding company. Through its insurance subsidiaries, the Company provides workers' compensation insurance coverage to select, small businesses in low to medium hazard industries. It provides workers' compensation insurance under a statutory system wherein employers are required to provide coverage for their employees' medical, disability, vocational rehabilitation, and/or death benefit costs for work-related injuries or illnesses. As of December 31, 2016 the Company provided workers' compensation insurance in 36 states and the District of Columbia, with a concentration in California. Its insurance subsidiaries include Employers Insurance Company of Nevada (EICN), Employers Compensation Insurance Company (ECIC), Employers Preferred Insurance Company (EPIC) and Employers Assurance Company (EAC). The Company's insurance products are jointly offered and marketed with and through its partners and alliances.

FINANCIAL RATIOS  of  Employers Holdings (EIG)

Valuation Ratios
P/E Ratio 13.1
Price to Sales 1.8
Price to Book 1.7
Price to Tangible Book
Price to Cash Flow 11.4
Price to Free Cash Flow 11.9
Growth Rates
Sales Growth Rate 3.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -58.3%
Cap. Spend. - 3 Yr. Gr. Rate 0%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 3.8%
Total Debt to Equity 3.8%
Interest Coverage 0
Management Effectiveness
Return On Assets 2.8%
Ret/ On Assets - 3 Yr. Avg. 2.7%
Return On Total Capital 12.8%
Ret/ On T. Cap. - 3 Yr. Avg. 12.9%
Return On Equity 13.4%
Return On Equity - 3 Yr. Avg. 14.1%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 19.2%
EBITDA Margin - 3 Yr. Avg. 16.3%
Operating Margin 18.2%
Oper. Margin - 3 Yr. Avg. 15.3%
Pre-Tax Margin 18.1%
Pre-Tax Margin - 3 Yr. Avg. 15%
Net Profit Margin 13.7%
Net Profit Margin - 3 Yr. Avg. 13.1%
Effective Tax Rate 24.1%
Eff/ Tax Rate - 3 Yr. Avg. 11.6%
Payout Ratio 11.2%

EIG stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the EIG stock intrinsic value calculation we used $780 million for the last fiscal year's total revenue generated by Employers Holdings. The default revenue input number comes from 2016 income statement of Employers Holdings. 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 EIG stock valuation model: a) initial revenue growth rate of 9.3% 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 4.3%, whose default value for EIG is calculated based on our internal credit rating of Employers Holdings, 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 Employers Holdings.
    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 EIG stock the variable cost ratio is equal to 86.4%.

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 EIG 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 3.5% for Employers Holdings.

Corporate tax rate of 27% is the nominal tax rate for Employers Holdings. 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 EIG 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 EIG are equal to 4.1%.

Life of production assets of 7.6 years is the average useful life of capital assets used in Employers Holdings 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 EIG 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 - $841 million for Employers Holdings - 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 32.658 million for Employers Holdings 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 Employers Holdings at the current share price and the inputted number of shares is $1.4 billion.

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COMPANY NEWS

▶ 6 Companies Growing Revenue and Earnings   [Jan-17-18 03:42PM  GuruFocus.com]
▶ Why Employers Holdings Inc (EIG) Could Be A Buy   [Nov-03-17 10:19AM  Simply Wall St.]
▶ Employers Holdings posts 3Q profit   [Oct-25-17 06:19PM  Associated Press]
▶ Employers Holdings posts 2Q profit   [Jul-28-17 01:34AM  Associated Press]
▶ Employers Holdings posts 1Q profit   [Apr-26-17 06:58PM  Associated Press]
▶ Employers Holdings posts 4Q profit   [05:02AM  Associated Press]
Financial statements of EIG
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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