Intrinsic value of Hallmark Financial Services - HALL

Previous Close

$10.74

  Intrinsic Value

$23.97

stock screener

  Rating & Target

str. buy

+123%

Previous close

$10.74

 
Intrinsic value

$23.97

 
Up/down potential

+123%

 
Rating

str. buy

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

We calculate the intrinsic value of HALL 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 0.2

 

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, %
  1.88
  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
  387
  395
  406
  417
  430
  444
  459
  475
  493
  512
  532
  553
  576
  601
  627
  654
  683
  714
  746
  781
  817
  855
  895
  938
  982
  1,029
  1,079
  1,131
  1,186
  1,243
Variable operating expenses, $m
 
  350
  358
  367
  377
  388
  401
  414
  429
  444
  461
  475
  494
  515
  537
  560
  584
  610
  638
  667
  697
  730
  764
  800
  837
  877
  919
  964
  1,010
  1,059
  1,110
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
  366
  350
  358
  367
  377
  388
  401
  414
  429
  444
  461
  475
  494
  515
  537
  560
  584
  610
  638
  667
  697
  730
  764
  800
  837
  877
  919
  964
  1,010
  1,059
  1,110
Operating income, $m
  13
  37
  38
  39
  40
  41
  43
  45
  46
  48
  50
  57
  59
  62
  64
  67
  70
  73
  76
  80
  83
  87
  91
  96
  100
  105
  110
  115
  121
  127
  133
EBITDA, $m
  17
  42
  43
  44
  46
  47
  48
  50
  52
  54
  56
  58
  61
  63
  66
  69
  72
  75
  78
  82
  85
  89
  93
  98
  103
  107
  113
  118
  124
  130
  136
Interest expense (income), $m
  4
  4
  5
  6
  7
  8
  10
  11
  13
  15
  17
  19
  21
  23
  26
  29
  32
  35
  38
  41
  45
  49
  53
  57
  61
  66
  71
  76
  82
  88
  94
Earnings before tax, $m
  8
  33
  33
  33
  33
  33
  33
  33
  33
  33
  33
  38
  38
  38
  38
  38
  38
  38
  38
  38
  39
  39
  39
  39
  39
  39
  39
  39
  39
  39
  39
Tax expense, $m
  1
  9
  9
  9
  9
  9
  9
  9
  9
  9
  9
  10
  10
  10
  10
  10
  10
  10
  10
  10
  10
  10
  10
  10
  10
  10
  10
  11
  11
  11
  11
Net income, $m
  7
  24
  24
  24
  24
  24
  24
  24
  24
  24
  24
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  29
  29

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
  1,162
  1,186
  1,213
  1,244
  1,279
  1,318
  1,361
  1,407
  1,457
  1,511
  1,569
  1,631
  1,697
  1,768
  1,843
  1,922
  2,007
  2,096
  2,190
  2,290
  2,395
  2,506
  2,623
  2,746
  2,876
  3,013
  3,157
  3,309
  3,469
  3,637
  3,814
Adjusted assets (=assets-cash), $m
  1,162
  1,186
  1,213
  1,244
  1,279
  1,318
  1,361
  1,407
  1,457
  1,511
  1,569
  1,631
  1,697
  1,768
  1,843
  1,922
  2,007
  2,096
  2,190
  2,290
  2,395
  2,506
  2,623
  2,746
  2,876
  3,013
  3,157
  3,309
  3,469
  3,637
  3,814
Revenue / Adjusted assets
  0.000
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
  0.326
Average production assets, $m
  14
  14
  14
  15
  15
  15
  16
  17
  17
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  29
  31
  32
  34
  35
  37
  39
  41
  43
  45
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
  86
  104
  125
  149
  176
  206
  239
  275
  313
  355
  400
  448
  499
  553
  611
  672
  737
  806
  878
  955
  1,036
  1,122
  1,212
  1,307
  1,408
  1,513
  1,624
  1,741
  1,865
  1,994
  2,130
Total liabilities, $m
  897
  914
  935
  959
  986
  1,016
  1,049
  1,085
  1,123
  1,165
  1,210
  1,258
  1,309
  1,363
  1,421
  1,482
  1,547
  1,616
  1,688
  1,765
  1,846
  1,932
  2,022
  2,117
  2,218
  2,323
  2,434
  2,551
  2,675
  2,804
  2,940
Total equity, $m
  266
  272
  278
  285
  293
  302
  312
  322
  334
  346
  359
  374
  389
  405
  422
  440
  459
  480
  502
  524
  548
  574
  601
  629
  659
  690
  723
  758
  794
  833
  873
Total liabilities and equity, $m
  1,163
  1,186
  1,213
  1,244
  1,279
  1,318
  1,361
  1,407
  1,457
  1,511
  1,569
  1,632
  1,698
  1,768
  1,843
  1,922
  2,006
  2,096
  2,190
  2,289
  2,394
  2,506
  2,623
  2,746
  2,877
  3,013
  3,157
  3,309
  3,469
  3,637
  3,813
Debt-to-equity ratio
  0.323
  0.380
  0.450
  0.520
  0.600
  0.680
  0.770
  0.850
  0.940
  1.030
  1.110
  1.200
  1.280
  1.370
  1.450
  1.530
  1.600
  1.680
  1.750
  1.820
  1.890
  1.960
  2.020
  2.080
  2.140
  2.190
  2.250
  2.300
  2.350
  2.390
  2.440
Adjusted equity ratio
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  7
  24
  24
  24
  24
  24
  24
  24
  24
  24
  24
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  29
  29
Depreciation, amort., depletion, $m
  4
  5
  5
  6
  6
  6
  6
  6
  6
  6
  6
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
Funds from operations, $m
  51
  29
  29
  30
  30
  30
  30
  30
  30
  30
  30
  29
  29
  29
  29
  29
  30
  30
  30
  30
  30
  30
  30
  30
  31
  31
  31
  31
  31
  31
  32
Change in working capital, $m
  20
  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
  31
  29
  29
  30
  30
  30
  30
  30
  30
  30
  30
  29
  29
  29
  29
  29
  30
  30
  30
  30
  30
  30
  30
  30
  31
  31
  31
  31
  31
  31
  32
Maintenance CAPEX, $m
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
New CAPEX, $m
  -4
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
Cash from investing activities, $m
  -58
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -5
Free cash flow, $m
  -27
  28
  28
  28
  28
  28
  28
  28
  28
  28
  28
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
  27
Issuance/(repayment) of debt, $m
  0
  18
  21
  24
  27
  30
  33
  36
  39
  42
  45
  48
  51
  54
  58
  61
  65
  69
  73
  77
  81
  86
  90
  95
  100
  106
  111
  117
  123
  130
  136
Issuance/(repurchase) of shares, $m
  -6
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  3
  5
  6
  8
  10
  12
Cash from financing (excl. dividends), $m  
  -7
  18
  21
  24
  27
  30
  33
  36
  39
  42
  45
  48
  51
  54
  58
  61
  65
  69
  73
  77
  81
  86
  90
  95
  101
  109
  116
  123
  131
  140
  148
Total cash flow (excl. dividends), $m
  -35
  46
  49
  52
  55
  58
  61
  64
  67
  70
  73
  75
  78
  81
  85
  88
  92
  96
  100
  104
  108
  113
  117
  122
  129
  135
  143
  150
  158
  166
  175
Retained Cash Flow (-), $m
  -4
  -6
  -6
  -7
  -8
  -9
  -10
  -11
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -35
  -37
  -38
  -40
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
 
  41
  43
  45
  47
  49
  51
  53
  55
  58
  60
  61
  63
  65
  68
  70
  73
  75
  78
  81
  84
  87
  90
  94
  99
  104
  110
  115
  121
  128
  134
Discount rate, %
 
  6.60
  6.93
  7.28
  7.64
  8.02
  8.42
  8.84
  9.29
  9.75
  10.24
  10.75
  11.29
  11.85
  12.45
  13.07
  13.72
  14.41
  15.13
  15.88
  16.68
  17.51
  18.39
  19.31
  20.27
  21.29
  22.35
  23.47
  24.64
  25.87
  27.17
PV of cash for distribution, $m
 
  38
  38
  37
  35
  34
  32
  30
  27
  25
  23
  20
  17
  15
  13
  11
  9
  8
  6
  5
  4
  3
  2
  2
  1
  1
  1
  0
  0
  0
  0
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
  99.7
  99.1
  98.2
  97.0
  95.6
  94.0
  92.2

Hallmark Financial Services, Inc. is an insurance holding company. The Company markets, distributes, underwrites and services its property/casualty insurance products to businesses and individuals. Its business involves marketing, distributing, underwriting and servicing insurance products, as well as providing other insurance related services. Its segments include Standard Commercial Segment, Specialty Commercial Segment and Personal Segment. The Company's Standard Commercial P&C operating unit primarily underwrites low-severity, short-tailed commercial property/casualty insurance products in the standard market. The Company reinsures a portion of the risk it underwrites in order to control the exposure to losses and to protect capital resources. Its Workers Compensation operating unit specializes in small and middle market workers compensation business. Its Specialty Commercial operating unit offers general aviation and satellite launch insurance products and services.

FINANCIAL RATIOS  of  Hallmark Financial Services (HALL)

Valuation Ratios
P/E Ratio 28.6
Price to Sales 0.5
Price to Book 0.8
Price to Tangible Book
Price to Cash Flow 6.4
Price to Free Cash Flow 7.4
Growth Rates
Sales Growth Rate 1.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0%
Cap. Spend. - 3 Yr. Gr. Rate 32%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 32.3%
Total Debt to Equity 32.3%
Interest Coverage 3
Management Effectiveness
Return On Assets 0.9%
Ret/ On Assets - 3 Yr. Avg. 1.7%
Return On Total Capital 2%
Ret/ On T. Cap. - 3 Yr. Avg. 4.3%
Return On Equity 2.7%
Return On Equity - 3 Yr. Avg. 5.5%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 4.2%
EBITDA Margin - 3 Yr. Avg. 7.7%
Operating Margin 3.4%
Oper. Margin - 3 Yr. Avg. 6.6%
Pre-Tax Margin 2.1%
Pre-Tax Margin - 3 Yr. Avg. 5.5%
Net Profit Margin 1.8%
Net Profit Margin - 3 Yr. Avg. 3.9%
Effective Tax Rate 12.5%
Eff/ Tax Rate - 3 Yr. Avg. 25.1%
Payout Ratio 0%

HALL stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HALL stock intrinsic value calculation we used $379 million for the last fiscal year's total revenue generated by Hallmark Financial Services. The default revenue input number comes from 2016 income statement of Hallmark Financial Services. 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 HALL 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 6.6%, whose default value for HALL is calculated based on our internal credit rating of Hallmark Financial Services, 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 Hallmark Financial Services.
    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 HALL stock the variable cost ratio is equal to 90.5%.

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 HALL 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 4.7% for Hallmark Financial Services.

Corporate tax rate of 27% is the nominal tax rate for Hallmark Financial Services. 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 HALL 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 HALL are equal to 3.6%.

Life of production assets of 14.6 years is the average useful life of capital assets used in Hallmark Financial Services 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 HALL 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 - $266 million for Hallmark Financial Services - 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 18.176 million for Hallmark Financial Services 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 Hallmark Financial Services at the current share price and the inputted number of shares is $0.2 billion.

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COMPANY NEWS

▶ Hallmark Financial reports 3Q loss   [Nov-08-17 05:41PM  Associated Press]
▶ Hallmark Financial reports 2Q loss   [Aug-07-17 11:19PM  Associated Press]
▶ New Strong Sell Stocks for May 17th   [May-17-17 10:03AM  Zacks]
▶ Hallmark Financial posts 1Q profit   [May-09-17 06:24PM  Associated Press]
▶ Hallmark Financial reports 4Q loss   [Mar-09-17 06:26PM  Associated Press]
▶ New Strong Sell Stocks for January 23rd   [Jan-23-17 07:51AM  Zacks]
▶ How DURECT Corporation (DRRX) Stacks Up Against Its Peers   [Dec-15-16 08:18PM  Insider Monkey]
▶ 5 brands with great reputations: What they do best   [Mar-29-16 05:30PM  at CNBC]
▶ Hedge Funds Are Buying Quotient Ltd (QTNT)   [06:27AM  at Insider Monkey]
Financial statements of HALL
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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