Property & Casualty Insurance company Cincinnati Financial is taking Wall Street by surprise today, falling to $107.28 and marking a -4.3% change compared to the S&P 500, which moved 1.0%. CINF is -10.49% below its average analyst target price of $119.86, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Cincinnati Financial has underperfomed the S&P 500 by -32.5%, moving -12.2%.
Cincinnati Financial Corporation, together with its subsidiaries, provides property casualty insurance products in the United States. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
Cincinnati Financial's trailing 12 month P/E ratio is 9.2, based on its trailing EPS of $11.66. The company has a forward P/E ratio of 15.9 according to its forward EPS of $6.76 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the finance sector has an average P/E ratio of 12.38, and the average for the S&P 500 is 15.97.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide Cincinnati Financial's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 1.0. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Cincinnati Financial was $2.09 Billion as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, CINF is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 12.3% and has on average been $1.65 Billion.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Cincinnati financial's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.39, but is still below the average P/B ratio of the Finance sector, which stood at 1.58 as of the first quarter of 2023.
Cincinnati Financial is likely fairly valued at today's prices because it has a Very low P/E ratio, an average P/B ratio, and generally positive cash flows with an upwards trend. The stock has mixed growth prospects because of its strong operating margins with a stable trend, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into CINF's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
