Intrinsic value of Employers Holdings - EIG

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$38.95

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$38.95

 
Intrinsic value

$75.42

 
Up/down potential

+94%

 
Rating

str. buy

 
Value-price divergence* premium content

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

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

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

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 1.3

 

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
  4.30
  4.37
  4.43
  4.49
  4.54
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.80
  4.82
  4.84
  4.86
  4.87
  4.88
  4.89
  4.91
  4.91
  4.92
  4.93
  4.94
  4.94
  4.95
  4.95
  4.96
  4.96
  4.97
Revenue, $m
  0
  814
  849
  887
  927
  969
  1,013
  1,060
  1,109
  1,161
  1,216
  1,274
  1,335
  1,399
  1,467
  1,538
  1,612
  1,691
  1,774
  1,860
  1,952
  2,048
  2,148
  2,254
  2,366
  2,483
  2,605
  2,735
  2,870
  3,013
  3,162
Variable operating expenses, $m
 
  703
  733
  766
  800
  836
  874
  914
  957
  1,002
  1,049
  1,095
  1,147
  1,203
  1,261
  1,322
  1,386
  1,453
  1,524
  1,599
  1,677
  1,760
  1,846
  1,937
  2,033
  2,133
  2,239
  2,350
  2,467
  2,589
  2,718
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
  703
  733
  766
  800
  836
  874
  914
  957
  1,002
  1,049
  1,095
  1,147
  1,203
  1,261
  1,322
  1,386
  1,453
  1,524
  1,599
  1,677
  1,760
  1,846
  1,937
  2,033
  2,133
  2,239
  2,350
  2,467
  2,589
  2,718
Operating income, $m
  142
  111
  116
  121
  127
  133
  139
  145
  152
  160
  167
  179
  188
  197
  206
  216
  227
  238
  249
  262
  274
  288
  302
  317
  333
  349
  366
  385
  404
  424
  445
EBITDA, $m
  151
  119
  124
  129
  135
  141
  148
  155
  162
  170
  178
  186
  195
  204
  214
  225
  235
  247
  259
  272
  285
  299
  314
  329
  345
  362
  380
  399
  419
  440
  462
Interest expense (income), $m
  0
  1
  5
  10
  15
  20
  26
  32
  38
  44
  51
  58
  66
  74
  82
  91
  101
  110
  121
  132
  143
  155
  168
  181
  195
  209
  225
  241
  258
  276
  294
Earnings before tax, $m
  141
  110
  110
  111
  112
  112
  113
  114
  115
  115
  116
  121
  122
  123
  124
  125
  126
  127
  129
  130
  132
  133
  135
  136
  138
  140
  142
  144
  146
  148
  150
Tax expense, $m
  34
  30
  30
  30
  30
  30
  31
  31
  31
  31
  31
  33
  33
  33
  33
  34
  34
  34
  35
  35
  36
  36
  36
  37
  37
  38
  38
  39
  39
  40
  41
Net income, $m
  107
  80
  81
  81
  82
  82
  83
  83
  84
  84
  85
  88
  89
  90
  90
  91
  92
  93
  94
  95
  96
  97
  98
  99
  101
  102
  103
  105
  106
  108
  110

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
  3,930
  4,102
  4,284
  4,476
  4,679
  4,894
  5,120
  5,359
  5,611
  5,876
  6,156
  6,450
  6,760
  7,086
  7,429
  7,790
  8,169
  8,568
  8,987
  9,428
  9,892
  10,379
  10,890
  11,428
  11,993
  12,587
  13,210
  13,866
  14,554
  15,277
Adjusted assets (=assets-cash), $m
  3,773
  3,930
  4,102
  4,284
  4,476
  4,679
  4,894
  5,120
  5,359
  5,611
  5,876
  6,156
  6,450
  6,760
  7,086
  7,429
  7,790
  8,169
  8,568
  8,987
  9,428
  9,892
  10,379
  10,890
  11,428
  11,993
  12,587
  13,210
  13,866
  14,554
  15,277
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
  33
  35
  36
  38
  40
  42
  43
  45
  48
  50
  52
  55
  57
  60
  63
  66
  69
  73
  76
  80
  84
  88
  92
  97
  102
  107
  112
  118
  124
  130
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
  154
  287
  428
  578
  736
  903
  1,079
  1,264
  1,460
  1,666
  1,883
  2,112
  2,352
  2,606
  2,872
  3,153
  3,447
  3,757
  4,083
  4,426
  4,786
  5,164
  5,562
  5,980
  6,419
  6,880
  7,364
  7,874
  8,408
  8,970
Total liabilities, $m
  2,933
  3,054
  3,187
  3,328
  3,478
  3,636
  3,803
  3,979
  4,164
  4,360
  4,566
  4,783
  5,012
  5,252
  5,506
  5,772
  6,053
  6,347
  6,657
  6,983
  7,326
  7,686
  8,064
  8,462
  8,880
  9,319
  9,780
  10,264
  10,774
  11,308
  11,870
Total equity, $m
  841
  876
  915
  955
  998
  1,043
  1,091
  1,142
  1,195
  1,251
  1,310
  1,373
  1,438
  1,507
  1,580
  1,657
  1,737
  1,822
  1,911
  2,004
  2,102
  2,206
  2,314
  2,429
  2,548
  2,674
  2,807
  2,946
  3,092
  3,245
  3,407
Total liabilities and equity, $m
  3,774
  3,930
  4,102
  4,283
  4,476
  4,679
  4,894
  5,121
  5,359
  5,611
  5,876
  6,156
  6,450
  6,759
  7,086
  7,429
  7,790
  8,169
  8,568
  8,987
  9,428
  9,892
  10,378
  10,891
  11,428
  11,993
  12,587
  13,210
  13,866
  14,553
  15,277
Debt-to-equity ratio
  0.038
  0.180
  0.310
  0.450
  0.580
  0.710
  0.830
  0.940
  1.060
  1.170
  1.270
  1.370
  1.470
  1.560
  1.650
  1.730
  1.810
  1.890
  1.970
  2.040
  2.100
  2.170
  2.230
  2.290
  2.350
  2.400
  2.450
  2.500
  2.550
  2.590
  2.630
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
  80
  81
  81
  82
  82
  83
  83
  84
  84
  85
  88
  89
  90
  90
  91
  92
  93
  94
  95
  96
  97
  98
  99
  101
  102
  103
  105
  106
  108
  110
Depreciation, amort., depletion, $m
  9
  8
  8
  8
  9
  9
  9
  9
  10
  10
  10
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  15
  15
  16
  17
Funds from operations, $m
  91
  88
  89
  89
  90
  91
  92
  92
  93
  94
  95
  95
  96
  97
  98
  100
  101
  102
  104
  105
  107
  108
  110
  112
  113
  115
  118
  120
  122
  124
  127
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
  86
  89
  89
  90
  91
  92
  92
  93
  94
  95
  95
  96
  97
  98
  100
  101
  102
  104
  105
  107
  108
  110
  112
  113
  115
  118
  120
  122
  124
  127
Maintenance CAPEX, $m
  0
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -16
New CAPEX, $m
  -5
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
Cash from investing activities, $m
  -89
  -5
  -5
  -7
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -11
  -11
  -11
  -12
  -12
  -14
  -14
  -15
  -15
  -16
  -17
  -18
  -18
  -19
  -21
  -21
  -22
Free cash flow, $m
  34
  80
  83
  83
  84
  84
  85
  85
  86
  86
  87
  86
  87
  87
  88
  89
  89
  90
  91
  92
  93
  94
  95
  96
  97
  98
  99
  100
  102
  103
  104
Issuance/(repayment) of debt, $m
  0
  122
  133
  141
  149
  158
  167
  176
  186
  196
  206
  217
  229
  241
  253
  266
  280
  295
  310
  326
  343
  360
  378
  398
  418
  439
  461
  485
  509
  535
  562
Issuance/(repurchase) of shares, $m
  -21
  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 financing (excl. dividends), $m  
  -12
  122
  133
  141
  149
  158
  167
  176
  186
  196
  206
  217
  229
  241
  253
  266
  280
  295
  310
  326
  343
  360
  378
  398
  418
  439
  461
  485
  509
  535
  562
Total cash flow (excl. dividends), $m
  23
  202
  216
  225
  233
  242
  251
  261
  271
  282
  293
  303
  315
  328
  341
  355
  370
  385
  401
  418
  435
  454
  473
  493
  515
  537
  560
  585
  611
  638
  666
Retained Cash Flow (-), $m
  -80
  -35
  -38
  -41
  -43
  -45
  -48
  -51
  -53
  -56
  -59
  -62
  -66
  -69
  -73
  -76
  -80
  -85
  -89
  -94
  -98
  -103
  -109
  -114
  -120
  -126
  -132
  -139
  -146
  -153
  -161
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
 
  167
  178
  184
  190
  197
  203
  211
  218
  226
  234
  241
  250
  259
  269
  279
  289
  300
  312
  324
  337
  350
  364
  379
  395
  411
  428
  446
  465
  484
  505
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
 
  160
  163
  160
  157
  152
  148
  142
  136
  130
  122
  114
  107
  98
  90
  82
  74
  65
  57
  50
  43
  36
  30
  25
  20
  16
  12
  10
  7
  5
  4
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Employers Holdings, Inc., through its subsidiaries, operates in the commercial property and casualty insurance industry primarily in the United States. The company provides workers' compensation insurance to small businesses in low to medium hazard industries. It markets its products through independent local, regional, and national agents and brokers; and alternative distribution channels, including its partners, as well as national, regional, and local trade groups and associations. Employers Holdings, Inc. was founded in 2000 and is based in Reno, Nevada.

FINANCIAL RATIOS  of  Employers Holdings (EIG)

Valuation Ratios
P/E Ratio 11.7
Price to Sales 1.6
Price to Book 1.5
Price to Tangible Book
Price to Cash Flow 10.2
Price to Free Cash Flow 10.6
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 4.3% 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 32.148 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 $1.3 billion.


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COMPANY NEWS

▶ Employers Holdings posts 4Q profit   [05:02AM  Associated Press]
Stock chart of EIG 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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