Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft (FRA:MUV2) Is Undervalued By 20.48%
Insurance stocks such as MUV2 are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. For example, insurance companies are required to hold more capital to reduce the risk to shareholders. Examining line items like book values, as well as the return and cost of equity, can be useful for estimating MUV2’s value. Below I’ll determine how to value MUV2 in a fairly useful and straightforward approach.
View our latest analysis for Münchener Rückversicherungs-Gesellschaft
What Model Should You Use?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. The regulatory environment in Germany is fairly rigorous. Furthermore, insurance companies generally don’t possess substantial amounts of tangible assets on their balance sheet. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.
The Calculation
The central 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 above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (9.63% – 8.11%) x €196.88 = €2.99
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)
= €2.99 / (8.11% – 0.54%) = €39.48
These factors are combined to calculate the true value of MUV2’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= €196.88 + €39.48 = €236.36
This results in an intrinsic value of €236.36. Compared to the current share price of €188, MUV2 is , at this time, priced below its intrinsic value. This means MUV2 can be bought today at a discount. Valuation is only one part of your investment analysis for whether to buy or sell MUV2. Fundamental factors are key to determining if MUV2 fits with the rest of your portfolio holdings.
Next Steps:
For insurance companies, there are three key aspects you should look at:
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.
Future earnings: What does the market think of MUV2 going forward? Our analyst growth expectation chart helps visualize MUV2’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether MUV2 is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on MUV2 here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
