Intrinsic value of EMC Insurance Group - EMCI

Previous Close

$27.59

  Intrinsic Value

$42.91

stock screener

  Rating & Target

str. buy

+56%

  Value-price divergence*

0%

Previous close

$27.59

 
Intrinsic value

$42.91

 
Up/down potential

+56%

 
Rating

str. buy

 
Value-price divergence*

0%

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

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

We calculate the intrinsic value of EMCI 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 0.6

 

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, %
  3.36
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  0
  659
  674
  691
  711
  732
  756
  782
  810
  840
  872
  906
  943
  982
  1,024
  1,068
  1,115
  1,165
  1,217
  1,272
  1,331
  1,392
  1,457
  1,526
  1,598
  1,674
  1,754
  1,839
  1,928
  2,021
  2,119
Variable operating expenses, $m
 
  583
  597
  612
  629
  648
  669
  692
  717
  743
  772
  802
  835
  869
  906
  945
  987
  1,030
  1,077
  1,126
  1,177
  1,232
  1,290
  1,350
  1,414
  1,482
  1,552
  1,627
  1,706
  1,788
  1,875
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
  583
  583
  597
  612
  629
  648
  669
  692
  717
  743
  772
  802
  835
  869
  906
  945
  987
  1,030
  1,077
  1,126
  1,177
  1,232
  1,290
  1,350
  1,414
  1,482
  1,552
  1,627
  1,706
  1,788
  1,875
Operating income, $m
  64
  76
  78
  80
  82
  84
  87
  90
  93
  97
  100
  104
  109
  113
  118
  123
  128
  134
  140
  147
  153
  160
  168
  176
  184
  193
  202
  212
  222
  233
  244
EBITDA, $m
  64
  76
  78
  80
  82
  84
  87
  90
  93
  97
  100
  104
  109
  113
  118
  123
  128
  134
  140
  147
  153
  160
  168
  176
  184
  193
  202
  212
  222
  233
  244
Interest expense (income), $m
  0
  1
  2
  3
  4
  5
  6
  7
  9
  10
  12
  14
  16
  18
  20
  22
  25
  28
  30
  33
  36
  40
  43
  47
  51
  55
  59
  63
  68
  73
  78
Earnings before tax, $m
  63
  75
  76
  77
  78
  79
  81
  83
  84
  86
  88
  90
  93
  95
  98
  101
  104
  107
  110
  113
  117
  121
  125
  129
  133
  138
  143
  148
  154
  160
  166
Tax expense, $m
  17
  20
  20
  21
  21
  21
  22
  22
  23
  23
  24
  24
  25
  26
  26
  27
  28
  29
  30
  31
  32
  33
  34
  35
  36
  37
  39
  40
  42
  43
  45
Net income, $m
  46
  54
  55
  56
  57
  58
  59
  60
  62
  63
  64
  66
  68
  70
  71
  73
  76
  78
  80
  83
  85
  88
  91
  94
  97
  101
  105
  108
  112
  117
  121

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
  1,589
  1,619
  1,656
  1,699
  1,747
  1,800
  1,858
  1,921
  1,989
  2,063
  2,142
  2,227
  2,317
  2,414
  2,516
  2,624
  2,739
  2,861
  2,990
  3,126
  3,270
  3,421
  3,581
  3,749
  3,927
  4,114
  4,311
  4,518
  4,736
  4,965
  5,207
Adjusted assets (=assets-cash), $m
  1,589
  1,619
  1,656
  1,699
  1,747
  1,800
  1,858
  1,921
  1,989
  2,063
  2,142
  2,227
  2,317
  2,414
  2,516
  2,624
  2,739
  2,861
  2,990
  3,126
  3,270
  3,421
  3,581
  3,749
  3,927
  4,114
  4,311
  4,518
  4,736
  4,965
  5,207
Revenue / Adjusted assets
  0.000
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
  0.407
Average production assets, $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
Working capital, $m
  0
  37
  38
  39
  40
  41
  42
  44
  45
  47
  49
  51
  53
  55
  57
  60
  62
  65
  68
  71
  75
  78
  82
  85
  90
  94
  98
  103
  108
  113
  119
Total debt, $m
  36
  56
  80
  108
  139
  173
  211
  252
  297
  345
  397
  452
  511
  574
  640
  711
  786
  865
  949
  1,038
  1,132
  1,231
  1,335
  1,445
  1,560
  1,682
  1,811
  1,946
  2,088
  2,237
  2,395
Total liabilities, $m
  1,035
  1,056
  1,080
  1,108
  1,139
  1,173
  1,211
  1,252
  1,297
  1,345
  1,397
  1,452
  1,511
  1,574
  1,640
  1,711
  1,786
  1,865
  1,949
  2,038
  2,132
  2,231
  2,335
  2,445
  2,560
  2,682
  2,811
  2,946
  3,088
  3,237
  3,395
Total equity, $m
  553
  563
  576
  591
  608
  626
  646
  668
  692
  718
  746
  775
  806
  840
  876
  913
  953
  996
  1,040
  1,088
  1,138
  1,191
  1,246
  1,305
  1,367
  1,432
  1,500
  1,572
  1,648
  1,728
  1,812
Total liabilities and equity, $m
  1,588
  1,619
  1,656
  1,699
  1,747
  1,799
  1,857
  1,920
  1,989
  2,063
  2,143
  2,227
  2,317
  2,414
  2,516
  2,624
  2,739
  2,861
  2,989
  3,126
  3,270
  3,422
  3,581
  3,750
  3,927
  4,114
  4,311
  4,518
  4,736
  4,965
  5,207
Debt-to-equity ratio
  0.065
  0.100
  0.140
  0.180
  0.230
  0.280
  0.330
  0.380
  0.430
  0.480
  0.530
  0.580
  0.630
  0.680
  0.730
  0.780
  0.820
  0.870
  0.910
  0.950
  0.990
  1.030
  1.070
  1.110
  1.140
  1.180
  1.210
  1.240
  1.270
  1.290
  1.320
Adjusted equity ratio
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348
  0.348

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  46
  54
  55
  56
  57
  58
  59
  60
  62
  63
  64
  66
  68
  70
  71
  73
  76
  78
  80
  83
  85
  88
  91
  94
  97
  101
  105
  108
  112
  117
  121
Depreciation, amort., depletion, $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
Funds from operations, $m
  121
  54
  55
  56
  57
  58
  59
  60
  62
  63
  65
  66
  68
  70
  71
  73
  76
  78
  80
  83
  85
  88
  91
  94
  97
  101
  105
  108
  112
  117
  121
Change in working capital, $m
  38
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
  5
  5
Cash from operations, $m
  83
  54
  54
  55
  56
  57
  58
  59
  60
  61
  63
  64
  66
  67
  69
  71
  73
  75
  77
  80
  82
  85
  87
  90
  93
  97
  100
  104
  107
  111
  115
Maintenance 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
  0
  0
  0
  0
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
  0
  0
  0
  0
Cash from investing activities, $m
  -78
  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
Free cash flow, $m
  5
  54
  54
  55
  56
  57
  58
  59
  60
  61
  63
  64
  66
  67
  69
  71
  73
  75
  77
  80
  82
  85
  87
  90
  93
  97
  100
  104
  107
  111
  115
Issuance/(repayment) of debt, $m
  0
  20
  24
  28
  31
  35
  38
  41
  45
  48
  52
  55
  59
  63
  67
  71
  75
  79
  84
  89
  94
  99
  104
  110
  116
  122
  128
  135
  142
  150
  157
Issuance/(repurchase) of shares, $m
  11
  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  
  10
  20
  24
  28
  31
  35
  38
  41
  45
  48
  52
  55
  59
  63
  67
  71
  75
  79
  84
  89
  94
  99
  104
  110
  116
  122
  128
  135
  142
  150
  157
Total cash flow (excl. dividends), $m
  16
  73
  79
  83
  87
  91
  96
  100
  105
  109
  114
  119
  125
  130
  136
  142
  148
  154
  161
  168
  176
  183
  192
  200
  209
  219
  228
  239
  249
  261
  273
Retained Cash Flow (-), $m
  -28
  -10
  -13
  -15
  -17
  -18
  -20
  -22
  -24
  -26
  -28
  -29
  -31
  -33
  -36
  -38
  -40
  -42
  -45
  -47
  -50
  -53
  -56
  -59
  -62
  -65
  -68
  -72
  -76
  -80
  -84
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
 
  63
  66
  68
  70
  73
  75
  78
  81
  84
  87
  90
  93
  97
  100
  104
  108
  112
  116
  121
  126
  131
  136
  142
  147
  153
  160
  167
  174
  181
  189
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
 
  60
  60
  59
  58
  57
  55
  53
  51
  48
  45
  43
  40
  37
  34
  31
  27
  24
  21
  19
  16
  14
  11
  9
  8
  6
  5
  4
  3
  2
  1
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

EMC Insurance Group Inc., an insurance holding company, provides property and casualty insurance, and reinsurance products in the United States. It operates through two segments, Property and Casualty Insurance, and Reinsurance. The Property and Casualty Insurance segment writes commercial and personal lines of insurance products. Its commercial lines of insurance products comprise automobile, property, workersÂ’ compensation, and liability, as well as other products that provide protection against burglary and theft loss, aircraft, marine, and other types of losses; and personal lines of insurance products include automobile, property, and liability. The Reinsurance segment provides reinsurance for other insurers and reinsurers. EMC Insurance Group Inc. offers its products to small and medium-sized businesses, institutions, and individual consumers through independent insurance agents. The company was founded in 1974 and is headquartered in Des Moines, Iowa. EMC Insurance Group Inc. is a subsidiary of Employers Mutual Casualty Company.

FINANCIAL RATIOS  of  EMC Insurance Group (EMCI)

Valuation Ratios
P/E Ratio 12.7
Price to Sales 0.9
Price to Book 1.1
Price to Tangible Book
Price to Cash Flow 7.1
Price to Free Cash Flow 7.1
Growth Rates
Sales Growth Rate 3.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate NaN%
Cap. Spend. - 3 Yr. Gr. Rate NaN%
Financial Strength
Quick Ratio 0
Current Ratio NaN
LT Debt to Equity 0%
Total Debt to Equity 6.5%
Interest Coverage 0
Management Effectiveness
Return On Assets 2.9%
Ret/ On Assets - 3 Yr. Avg. 2.8%
Return On Total Capital 8%
Ret/ On T. Cap. - 3 Yr. Avg. 7.7%
Return On Equity 8.5%
Return On Equity - 3 Yr. Avg. 8.2%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 9.8%
EBITDA Margin - 3 Yr. Avg. 9.4%
Operating Margin 9.8%
Oper. Margin - 3 Yr. Avg. 9.4%
Pre-Tax Margin 9.8%
Pre-Tax Margin - 3 Yr. Avg. 9.4%
Net Profit Margin 7.1%
Net Profit Margin - 3 Yr. Avg. 6.7%
Effective Tax Rate 27%
Eff/ Tax Rate - 3 Yr. Avg. 28.1%
Payout Ratio 34.8%

EMCI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the EMCI stock intrinsic value calculation we used $646 million for the last fiscal year's total revenue generated by EMC Insurance Group. The default revenue input number comes from 2016 income statement of EMC Insurance Group. 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 EMCI stock valuation model: a) initial revenue growth rate of 2% 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 EMCI is calculated based on our internal credit rating of EMC Insurance Group, 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 EMC Insurance Group.
    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 EMCI stock the variable cost ratio is equal to 88.5%.

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 EMCI 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 EMC Insurance Group.

Corporate tax rate of 27% is the nominal tax rate for EMC Insurance Group. 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 EMCI 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 EMCI are equal to 0%.

Life of production assets of 10 years is the average useful life of capital assets used in EMC Insurance Group 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 EMCI is equal to 5.6%. 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 - $553 million for EMC Insurance Group - 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 21.019 million for EMC Insurance Group 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 EMC Insurance Group at the current share price and the inputted number of shares is $0.6 billion.

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COMPANY NEWS

▶ EMC Insurance Group posts 2Q profit   [Aug-08-17 11:56PM  Associated Press]
▶ EMC Insurance Group Inc. Declares Quarterly Cash Dividend   [May-25-17 04:15PM  GlobeNewswire]
▶ EMC Insurance Group posts 1Q profit   [06:39AM  Associated Press]
▶ EMC Insurance Group posts 4Q profit   [06:48AM  Associated Press]
Stock chart of EMCI Financial statements of EMCI
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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