An Intrinsic Value Calculation For Amerisafe Inc (NASDAQ:AMSF) Shows Investors Are Overpaying
Valuing AMSF, an insurance stock, can be daunting since these financial firms generally have cash flows that are impacted by regulations that are not imposed upon other industries. For example, insurance companies are required to hold more capital to reduce the risk to shareholders. Emphasizing factors such as book values, as well as the return and cost of equity, may be suitable for gauging AMSF’s intrinsic value. Below I’ll take you through how to value AMSF in a reasonably accurate and easy method. View our latest analysis for Amerisafe
What Is The Excess Return Model?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. Strict regulatory environment in United States’s finance industry reduces AMSF’s financial flexibility. In addition, insurance companies tend to not have large amounts of physical assets as part of total assets. Therefore the Excess Returns model is appropriate for deriving the true value of AMSF as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.
Deriving AMSF’s True Value
The key assumption for Excess Returns is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (12.87% – 8.49%) * $24.55 = $1.07
We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= $1.07 / (8.49% – 2.47%) = $17.83
Combining these components gives us AMSF’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $24.55 + $17.83 = $42.38
Given AMSF’s current share price of $58.25, AMSF is currently trading above what it’s actually worth. Therefore, there’s no benefit to buying AMSF today. Pricing is one part of the analysis of your potential investment in AMSF. Analyzing fundamental factors are equally important when it comes to determining if AMSF has a place in your holdings.
Next Steps:
For insurance companies, there are three key aspects you should look at:
1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
2. Future earnings: What does the market think of AMSF going forward? Our analyst growth expectation chart helps visualize AMSF’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether AMSF is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on AMSF here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
