Standing out among the Street's worst performers today is Arch Capital, a property & casualty insurance company whose shares slumped -6.5% to a price of $107.35, 8.4% below its average analyst target price of $117.2.
The average analyst rating for the stock is buy. ACGL underperformed the S&P 500 index by -6.0% during today's afternoon session, but outpaced it by 7.3% over the last year with a return of 40.0%.
Arch Capital Group Ltd., together with its subsidiaries, provides insurance, reinsurance, and mortgage insurance products worldwide. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.
Arch Capital's trailing 12 month P/E ratio is 7.5, based on its trailing EPS of $14.22. The company has a forward P/E ratio of 11.8 according to its forward EPS of $9.11 -- 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 third quarter of 2024, the finance sector has an average P/E ratio of 20.04, and the average for the S&P 500 is 29.3.
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 Arch Capital'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 0.64. 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 Arch Capital was $5.7 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, ACGL 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 26.3% and has on average been $3.21 Billion.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Arch capital's P/B ratio is 2.03 -- in other words, the market value of the company exceeds its book value by a factor of more than 2, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.86 as of the third quarter of 2024.
Arch Capital 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 strong growth indicators because of its decent 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 ACGL's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.