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Mapfre SA (BME:MAP) Is Trading At A 29.26% Discount

One of the most difficult industry to value is insurance, given that they adhere to different rules compared to other companies. For instance, insurance firms that invest excess premiums are required to maintain a certain level of reserves to reduce the risk to shareholders. Focusing on data points such as book values, on top of the return and cost of equity, may be fitting for evaluating MAP’s true value. Below I will show you how to value MAP in a fairly effective and straightforward way.

View our latest analysis for Mapfre

What Is The Excess Return Model?

Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. The regulatory environment in Spain is fairly rigorous. Moreover, insurance companies usually do not hold large portions of tangible assets on their balance sheet. While traditional DCF models emphasize on inputs such as capital expenditure and depreciation, which is less useful for a financial stock, the Excess Return model focuses on book values and stable earnings.

BME:MAP Intrinsic Value Export December 3rd 18

Deriving MAP’s Intrinsic Value

The main assumption for Excess Returns is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. 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)

= (0.097% – 8.3%) x €2.95 = €0.044

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)

= €0.044 / (8.3% – 1.3%) = €0.63

These factors are combined to calculate the true value of MAP’s stock:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= €2.95 + €0.63 = €3.58

This results in an intrinsic value of €3.58. Compared to the current share price of €2.53, MAP is currently priced beneath its true value. This means there’s an upside to buying MAP today. Pricing is only one aspect when you’re looking at whether to buy or sell MAP. There are other important factors to keep in mind when assessing whether MAP is the right investment in your portfolio.

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 MAP going forward? Our analyst growth expectation chart helps visualize MAP’s growth potential over the upcoming years.
  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether MAP is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on MAP 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.