Intrinsic value of Employers Holdings - EIG

Previous Close

$48.10

  Intrinsic Value

$70.73

stock screener

  Rating & Target

buy

+47%

Previous close

$48.10

 
Intrinsic value

$70.73

 
Up/down potential

+47%

 
Rating

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

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 1.6

 

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
  3.70
  3.83
  3.95
  4.05
  4.15
  4.23
  4.31
  4.38
  4.44
  4.50
  4.55
  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
  4.90
  4.91
  4.92
  4.92
  4.93
  4.94
Revenue, $m
  0
  809
  840
  873
  908
  946
  986
  1,029
  1,074
  1,121
  1,172
  1,225
  1,281
  1,341
  1,403
  1,469
  1,539
  1,612
  1,689
  1,770
  1,856
  1,945
  2,040
  2,139
  2,244
  2,354
  2,469
  2,591
  2,718
  2,852
  2,993
Variable operating expenses, $m
 
  699
  725
  754
  784
  817
  851
  888
  926
  967
  1,011
  1,053
  1,101
  1,152
  1,206
  1,263
  1,322
  1,385
  1,452
  1,521
  1,595
  1,672
  1,753
  1,838
  1,928
  2,023
  2,122
  2,226
  2,336
  2,451
  2,572
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
  699
  725
  754
  784
  817
  851
  888
  926
  967
  1,011
  1,053
  1,101
  1,152
  1,206
  1,263
  1,322
  1,385
  1,452
  1,521
  1,595
  1,672
  1,753
  1,838
  1,928
  2,023
  2,122
  2,226
  2,336
  2,451
  2,572
Operating income, $m
  142
  110
  114
  119
  124
  129
  135
  141
  147
  154
  161
  172
  180
  189
  197
  207
  216
  227
  237
  249
  261
  274
  287
  301
  316
  331
  347
  364
  382
  401
  421
EBITDA, $m
  151
  118
  123
  127
  133
  138
  144
  150
  157
  164
  171
  179
  187
  196
  205
  215
  225
  235
  247
  258
  271
  284
  298
  312
  328
  344
  361
  378
  397
  416
  437
Interest expense (income), $m
  0
  1
  5
  9
  13
  18
  23
  28
  34
  40
  46
  52
  59
  67
  75
  83
  92
  101
  110
  120
  131
  142
  154
  166
  180
  193
  208
  223
  239
  256
  273
Earnings before tax, $m
  141
  109
  110
  110
  111
  112
  112
  113
  114
  115
  115
  120
  121
  122
  123
  124
  125
  126
  127
  129
  130
  131
  133
  134
  136
  138
  139
  141
  143
  145
  148
Tax expense, $m
  34
  29
  30
  30
  30
  30
  30
  31
  31
  31
  31
  32
  33
  33
  33
  33
  34
  34
  34
  35
  35
  35
  36
  36
  37
  37
  38
  38
  39
  39
  40
Net income, $m
  107
  80
  80
  81
  81
  81
  82
  82
  83
  84
  84
  87
  88
  89
  90
  90
  91
  92
  93
  94
  95
  96
  97
  98
  99
  101
  102
  103
  105
  106
  108

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
  3,908
  4,057
  4,217
  4,388
  4,570
  4,764
  4,969
  5,186
  5,417
  5,660
  5,918
  6,189
  6,476
  6,779
  7,097
  7,433
  7,787
  8,159
  8,551
  8,964
  9,398
  9,855
  10,335
  10,840
  11,370
  11,928
  12,515
  13,131
  13,778
  14,459
Adjusted assets (=assets-cash), $m
  3,773
  3,908
  4,057
  4,217
  4,388
  4,570
  4,764
  4,969
  5,186
  5,417
  5,660
  5,918
  6,189
  6,476
  6,779
  7,097
  7,433
  7,787
  8,159
  8,551
  8,964
  9,398
  9,855
  10,335
  10,840
  11,370
  11,928
  12,515
  13,131
  13,778
  14,459
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
  34
  36
  37
  39
  40
  42
  44
  46
  48
  50
  53
  55
  58
  60
  63
  66
  69
  73
  76
  80
  84
  88
  92
  96
  101
  106
  111
  117
  123
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
  136
  252
  377
  510
  651
  801
  961
  1,130
  1,309
  1,498
  1,698
  1,909
  2,132
  2,367
  2,615
  2,876
  3,150
  3,440
  3,745
  4,065
  4,402
  4,757
  5,130
  5,522
  5,935
  6,368
  6,824
  7,303
  7,806
  8,335
Total liabilities, $m
  2,933
  3,036
  3,152
  3,277
  3,410
  3,551
  3,701
  3,861
  4,030
  4,209
  4,398
  4,598
  4,809
  5,032
  5,267
  5,515
  5,776
  6,050
  6,340
  6,645
  6,965
  7,302
  7,657
  8,030
  8,422
  8,835
  9,268
  9,724
  10,203
  10,706
  11,235
Total equity, $m
  841
  871
  905
  940
  979
  1,019
  1,062
  1,108
  1,157
  1,208
  1,262
  1,320
  1,380
  1,444
  1,512
  1,583
  1,658
  1,736
  1,820
  1,907
  1,999
  2,096
  2,198
  2,305
  2,417
  2,536
  2,660
  2,791
  2,928
  3,073
  3,224
Total liabilities and equity, $m
  3,774
  3,907
  4,057
  4,217
  4,389
  4,570
  4,763
  4,969
  5,187
  5,417
  5,660
  5,918
  6,189
  6,476
  6,779
  7,098
  7,434
  7,786
  8,160
  8,552
  8,964
  9,398
  9,855
  10,335
  10,839
  11,371
  11,928
  12,515
  13,131
  13,779
  14,459
Debt-to-equity ratio
  0.038
  0.160
  0.280
  0.400
  0.520
  0.640
  0.750
  0.870
  0.980
  1.080
  1.190
  1.290
  1.380
  1.480
  1.570
  1.650
  1.730
  1.810
  1.890
  1.960
  2.030
  2.100
  2.160
  2.230
  2.280
  2.340
  2.390
  2.450
  2.490
  2.540
  2.580
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
  80
  81
  81
  81
  82
  82
  83
  84
  84
  87
  88
  89
  90
  90
  91
  92
  93
  94
  95
  96
  97
  98
  99
  101
  102
  103
  105
  106
  108
Depreciation, amort., depletion, $m
  9
  8
  8
  8
  9
  9
  9
  9
  9
  10
  10
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  10
  11
  12
  12
  13
  13
  14
  15
  15
  16
Funds from operations, $m
  91
  88
  88
  89
  89
  90
  91
  92
  92
  93
  94
  94
  95
  96
  97
  98
  99
  101
  102
  103
  105
  106
  108
  110
  111
  113
  115
  117
  119
  122
  124
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
  88
  88
  89
  89
  90
  91
  92
  92
  93
  94
  94
  95
  96
  97
  98
  99
  101
  102
  103
  105
  106
  108
  110
  111
  113
  115
  117
  119
  122
  124
Maintenance CAPEX, $m
  0
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -10
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -15
New CAPEX, $m
  -5
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
Cash from investing activities, $m
  -89
  -5
  -5
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -8
  -9
  -9
  -10
  -11
  -11
  -11
  -12
  -12
  -14
  -14
  -14
  -15
  -16
  -17
  -18
  -18
  -19
  -20
  -21
Free cash flow, $m
  34
  82
  83
  83
  83
  84
  84
  85
  85
  86
  86
  86
  86
  87
  87
  88
  89
  89
  90
  91
  92
  93
  94
  95
  96
  97
  98
  99
  100
  101
  103
Issuance/(repayment) of debt, $m
  0
  104
  116
  124
  133
  141
  150
  159
  169
  179
  189
  200
  211
  223
  235
  248
  261
  275
  289
  305
  321
  337
  355
  373
  392
  412
  433
  456
  479
  503
  529
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
  1
  5
  9
  13
  18
  23
  28
  33
  38
  44
Cash from financing (excl. dividends), $m  
  -12
  104
  116
  124
  133
  141
  150
  159
  169
  179
  189
  200
  211
  223
  235
  248
  261
  275
  289
  305
  321
  338
  360
  382
  405
  430
  456
  484
  512
  541
  573
Total cash flow (excl. dividends), $m
  23
  186
  199
  207
  216
  225
  234
  244
  254
  264
  275
  286
  297
  310
  322
  336
  350
  364
  380
  396
  412
  431
  453
  477
  501
  527
  554
  582
  612
  643
  675
Retained Cash Flow (-), $m
  -80
  -30
  -33
  -36
  -38
  -41
  -43
  -46
  -49
  -51
  -54
  -57
  -61
  -64
  -67
  -71
  -75
  -79
  -83
  -87
  -92
  -97
  -102
  -107
  -113
  -118
  -124
  -131
  -137
  -144
  -152
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
 
  156
  166
  172
  178
  185
  191
  198
  206
  213
  221
  228
  237
  246
  255
  265
  275
  285
  296
  308
  320
  334
  351
  370
  389
  408
  429
  451
  474
  498
  524
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
 
  150
  152
  149
  147
  143
  139
  134
  128
  122
  116
  108
  101
  93
  86
  78
  70
  62
  55
  47
  41
  35
  29
  24
  20
  16
  13
  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
  99.8
  99.6
  99.3
  98.9
  98.4
  97.9
  97.3
  96.6
  95.9

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 14.4
Price to Sales 2
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 12.6
Price to Free Cash Flow 13.1
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 3.7% 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 32.362 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 $1.6 billion.

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COMPANY NEWS

▶ 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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