Arch Capital Group Stock Shows Every Sign Of Being Modestly Undervalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Arch Capital Group (NAS:ACGL, 30-year Financials) shows every sign of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $39.16 per share and the market cap of $15.8 billion, Arch Capital Group stock is believed to be modestly undervalued. GF Value for Arch Capital Group is shown in the chart below.


Arch Capital Group Stock Shows Every Sign Of Being Modestly Undervalued
Arch Capital Group Stock Shows Every Sign Of Being Modestly Undervalued

Because Arch Capital Group is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 16.4% over the past three years and is estimated to grow 9.82% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Arch Capital Group has a cash-to-debt ratio of 0.30, which which ranks worse than 86% of the companies in Insurance industry. The overall financial strength of Arch Capital Group is 4 out of 10, which indicates that the financial strength of Arch Capital Group is poor. This is the debt and cash of Arch Capital Group over the past years:

Arch Capital Group Stock Shows Every Sign Of Being Modestly Undervalued
Arch Capital Group Stock Shows Every Sign Of Being Modestly Undervalued

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Arch Capital Group has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $8.3 billion and earnings of $3.33 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Insurance industry. Overall, GuruFocus ranks the profitability of Arch Capital Group at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Arch Capital Group over the past years:

Arch Capital Group Stock Shows Every Sign Of Being Modestly Undervalued
Arch Capital Group Stock Shows Every Sign Of Being Modestly Undervalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Arch Capital Group is 16.4%, which ranks better than 85% of the companies in Insurance industry. The 3-year average EBITDA growth rate is 22.1%, which ranks better than 81% of the companies in Insurance industry.

Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Arch Capital Group's ROIC was 4.32, while its WACC came in at 6.70. The historical ROIC vs WACC comparison of Arch Capital Group is shown below:

Arch Capital Group Stock Shows Every Sign Of Being Modestly Undervalued
Arch Capital Group Stock Shows Every Sign Of Being Modestly Undervalued

In closing, the stock of Arch Capital Group (NAS:ACGL, 30-year Financials) is estimated to be modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 81% of the companies in Insurance industry. To learn more about Arch Capital Group stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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