ACGL Stock Study (5-30-24)

Posted by Mark on July 3, 2024 at 07:02 | Last modified: May 30, 2024 14:11

I recently did a stock study on Arch Capital Group, Ltd. (ACGL) with a closing price of $203.09.

M* writes:

     > Arch Capital Group Ltd is a Bermuda company which writes insurance
     > and reinsurance with operations in Bermuda, the United States,
     > Canada, Europe, Australia and United Kingdom. The business operates
     > through three underwriting segments: insurance, reinsurance, and
     > mortgage two operating segments: corporate and other. The insurance
     > segment provides specialty risk solutions to client across a variety
     > of industries. The reinsurance segment provides reinsurance services
     > which cover property catastrophe, property, liability, marine,
     > aviation and space, trade credit and surety, agriculture, accident,
     > life and health, and political risk. The mortgage business provides
     > risk management and risk financing products to the mortgage
     > insurance sectors through platforms in the U.S., Europe and Bermuda.

Over the last 10 years, this large-size company has grown sales and EPS 14.2% and 21.3% per year, respectively. Lines are mostly up, straight, and parallel with a sales dip in 2015 and some rockiness due to EPS dips in ’15, ’17, ’20, and ’22.

Over the last decade, PTPM lags peer and industry averages while ranging from 14.1% in ’17 to 27.3% in ’19 with a last-5-year mean of 22.2%. ROE also lags peer and industry averages despite increasing from 13.3% (’14) to 30.1% (’23) with a last-5-year mean of 17.1%. Debt-to-Capital is lower than peer and industry averages while ranging from 12.8% in ’14 to 23.2% in ’16 with a last-5-year mean of 16.5%.

Interest Coverage is 29.2 and Value Line gives a “B++” rating for Financial Strength.

With regard to sales growth:

• YF projects YOY 19.5% and 12.3% for ’24 and ’25, respectively (based on 6 analysts).
• Zacks projects YOY 18.2% and 13.3% for ’24 and ’25, respectively (5 analysts).
• Value Line projects 12.6% annualized growth from ’23-’28.
• M* offers a 2-year ACE of 15.2%.

I am forecasting below the range at 12.0% per year.

With regard to EPS growth:

• MarketWatch projects 4.6% and 5.1% per year for ’23-’25 and ’23-’26, respectively (based on 18 analysts).
• Nasdaq.com projects 5.3% YOY and 5.4% per year for ’25 and ’24-’26 [7, 7, and 4 analyst(s) for ’24, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 3.5%.
• YF projects YOY 1.1% and 3.5% for ’24 and ’25, respectively (14), along with 5-year annualized growth of 19.7%.
• Zacks projects YOY 1.2% and 5.3% for ’24 and ’25, respectively (7), along with 5-year annualized growth of 5.1%.
• Value Line projects 11.3% annualized growth from ’23-’28.
• CFRA projects 3.7% YOY and 3.8% per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 18.0%.

My 3.0% forecast is below the long-term-estimate range (mean of four: 9.9%). Initial value is ’23 EPS of $11.62/share rather than 2024 Q1 EPS of $12.67 (annualized).

My Forecast High P/E is 9.0. Over the past decade, high P/E ranges from 7.8 in ’23 to 25.2 in ’17 (TCJA?) with a last-5-year mean of 11.8 and a last-5-year-mean average P/E of 9.4. I am forecasting toward the lower end of the range [only ’23 and ’21 (8.6) are less].

My Forecast Low P/E is 6.0. Over the past decade, low P/E ranges from 5.2 in ’23 to 20.7 in ’17 (TCJA?) with a last-5-year mean of 7.0. I am forecasting near the bottom of the range (only ’23 is lower).

My Low Stock Price Forecast (LSPF) of $69.70 is default based on initial value given above. This is 31.4% less than the previous close but 1.0% greater than the 52-week low.

These inputs land ACGL in the HOLD zone with a U/D ratio of 0.6. Total Annualized Return (TAR) is 3.6%.

PAR (using Forecast Average—not High—P/E) of -0.1% is unacceptable for any size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR but even that is lower than the current yield on T-bills.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 49 studies done in the past 90 days (my study and 11 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 13.6%, 11.8%, 11.3, and 7.0, respectively. I am lower across the board. Value Line projects a future average annual P/E of 13.0 that is greater than MS (9.2) and greater than mine (7.5).

MS high / low EPS are $20.03 / $10.92 versus my $13.47 / $11.62 (per share). My high EPS is lower due to a much lower growth rate. Value Line’s high EPS of $14.40 is closer to mine.

MS LSPF of $68.40 implies a Forecast Low P/E of 6.3 versus the above-stated 7.0. MS LSPF is 10.5% less than the default $10.92/share * 7.0 = $76.44 resulting in more conservative zoning. MS LSPF is also 1.9% less than mine.

TAR (over 15.0% preferred) is much less than MS 17.4%. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 2.4 and 2.6 per Zacks and my projected P/E: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly cheap at 0.85.

With the stock up 42% in the past year (per CFRA), I’m not surprised to see it far extended at the present time.

I may have lowballed the EPS forecast in going below the range. For initial value I do use ’23 EPS: up 206% YOY. I typically avoid using such a trendline excursion for the base in thinking mean reversion lurks ahead. I can’t help but wonder if this factors into the wide range of analyst estimates: some projecting a low (high) growth rate based off (pre-) 2023 earnings. While I have no additional info about those estimates, I can see that MS uses a slightly lower base.

More support of a lowball forecast is the discrepancy between sales and EPS growth rates. A 9.0% annualized difference over several years seems unsustainable.

Per U/D, ACGL is a BUY under $82/share. With a forecast high price ~$122, the BI TAR criterion won’t be satisfied until the stock falls to $61.