Is W R Berkley Corporation (NYSE:WRB) Worth $72.04 Based On Its Intrinsic Value?
Insurance stocks such as WRB 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 instance, insurance firms that invest excess premiums are required to maintain a certain level of reserves to reduce the risk to shareholders. Looking at data points such as book values, with the return and cost of equity, is appropriate for gauging WRB’s valuation. Below I’ll determine how to value WRB in a reasonably useful and uncomplicated method. Check out our latest analysis for W. R. Berkley
Why Excess Return Model?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. United States’s financial regulatory environment is relatively strict. In addition, insurance companies tend to not hold substantial portions of tangible assets on their books. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
The Calculation
The central assumption for this model 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)
= (10.56% – 9.08%) * $49.33 = $0.73
Excess Return Per Share is used to calculate the terminal value of WRB, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= $0.73 / (9.08% – 2.47%) = $11
These factors are combined to calculate the true value of WRB’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $49.33 + $11 = $60.33
Compared to the current share price of $72.04, WRB is trading in-line with its true value. Therefore, there’s a bit of a downside if you were to buy WRB today. Pricing is one part of the analysis of your potential investment in WRB. There are other important factors to keep in mind when assessing whether WRB 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 WRB going forward? Our analyst growth expectation chart helps visualize WRB’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether WRB is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on WRB 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.
