Is This Insurer Cheap According to Graham?

Earlier this year, I spent some time dissecting Benjamin Graham's The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.

However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I looked at the stocks of the S&P 500 that met the ideal situation mentioned above. Currently, there are 68 companies in the index that meet these criteria. I will be making a CAPScall on these companies after comparing them to competitors and their current value in relation to their Graham numbers. Up next is insurer Allstate (NYSE: ALL  ) .

Who are they?
Allstate may be best known for its "Mayhem" commercials, in which an actor portrays various calamities that could ultimately affect your insurance rates. Perhaps because of these commercials -- or in spite of them -- Allstate has managed to secure second place among U.S. car insurers and insures nearly 16 million households in one form or another.

Like most property and casualty insurers, earnings for the rest of the year could be affected by damage claims caused by Hurricane Isaac. Nevertheless, its most recent quarter was a huge success, and analysts are convinced that it should be able to weather the storm of hurricane claims. In the meantime, Allstate is currently trading with a P/E below 10 and sports a dividend yield around 2.3%.

What's it worth?:
Among other similarly sized insurers, Allstate is currently trading with the most upside in regards to its Graham number:

Company

EPS (ttm)

Book Value Per Share (mrq)

Graham Number

Recent Price

Upside

Allstate $4.10 $40.07 $60.80 $38.48 58%
Travelers Companies (NYSE: TRV  ) $5.56 $64.89 $90.10 $65.21 38.2%
Loews (NYSE: L  ) $2.15 $49.31 $48.84 $41.18 18.6%
Chubb Corporation (NYSE: CB  ) $5.93 $58.53 $88.37 $74.91 18%
Progressive (NYSE: PGR  ) $1.27 $10.32 $17.17 $19.39 (11.4%)

Source: Yahoo! Finance and author's calculations.

Travelers was the first Dow company to miss on earnings expectations this quarter, but it was still an improvement over last year, though they could feel a squeeze going forward if interest rates remain low. Loews has been described by some as a cheaper version of Berkshire Hathaway. The company holds a variety of assets and makes the insurance list because of its holding of CNA Financial, one of the largest commercial property-casualty insurance companies in the U.S.

Chubb matches Allstate with a 2.3% dividend yield, and our CAPS community thinks there are good things ahead for the insurer. Finally, Progressive drew fire recently after a blog post about some come policies went viral, with claims of around 1,000 people dropping the service. Nevertheless, Progressive has a unique dividend policy, fluctuating payments based on operating performance, which could keep future performance in check.

Accountability time
A stock's valuation, regardless of the method used, is only one thing to look at when evaluating a potential investment. With room to grow into its Graham number valuation, I will be giving this company a thumbs-up over on my CAPS page in order to track this call and keep myself accountable. I will also be adding Allstate to My Watchlist to stay up to date on anything that may cause me to change my opinion of the company.

If you are looking to find other companies to add to your retirement portfolio, be sure to pick up a copy of our free special report "3 Stocks That Will Help You Retire Rich" featuring a company mentioned in this article. Click here to get your copy while it's still available.

Fool contributor Robert Eberhard owns shares of Berkshire Hathaway, but holds no position in any other company mentioned. Follow him on Twitter, or click here to see his holdings and a short bio. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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