Swiss insurance and reinsurance giant Chubb Limited (CB 1.10%) may not be all that well known in the United States. That's a shame, because it frequently cracks the list of top ten companies by revenue, among insurance companies whose shares US investors can easily buy .
NYSE: CB
Key Data Points
Still, the fact that it's big enough and trusted enough to be a reinsurer -- a backstop for other insurance companies whose claims exceed their expectations -- means it's no fly by-night company. Yet its shares are currently trading at a reasonable discount to what looks like their fair value.
That raises a key question: Could Chubb be an undervalued stock capable of making you a millionaire one day? While the future is never really known until it happens, there are good reasons to believe that it could play a role in helping your portfolio get there.
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It really does look like a value
Analysts expect Chubb to earn $21.68 per share in 2024 and $23.76 per share in 2025. That's a solid earnings growth rate of just above 9.5%. Over the next five years, those same analysts even expect Chubb's earnings growth to accelerate to nearly 18% annualized.
Yet even without that fast earnings growth, it's possible to make a strong case that Chubb's shares are available at a bargain price. The table below shows a discounted earnings model valuation for Chubb that sets its fair value at $324.04, well above its recent market price of $259.13.
|
Year |
Raw Earnings |
Discounted |
|---|---|---|
|
1 |
$21.68 |
$19.36 |
|
2 |
$23.76 |
$18.94 |
|
3 |
$26.02 |
$18.52 |
|
4 |
$28.49 |
$18.11 |
|
5 |
$31.20 |
$17.70 |
|
6 |
$33.14 |
$16.79 |
|
7 |
$35.22 |
$15.93 |
|
8 |
$37.42 |
$15.11 |
|
9 |
$39.76 |
$14.34 |
|
10 |
$42.24 |
$13.60 |
|
Perpetuity |
$483.42 |
$155.65 |
|
Fair Value Estimate |
N/A |
$324.04 |
Data source: author.
The model assumes Chubb's earnings at analysts' estimated levels for 2024 and 2025 (years 1 and 2), growth at that 9.5% through year 5, and a slow down after that until it reaches 3% "in perpetuity". It also uses a discount rate of 12%, which represents the investor's expected return rate if the company delivers exactly to expectations.
In a nutshell, it means that even if Chubb delivers growth over the next five years that ends up a bit behind what analysts expect, investors have good reason to believe they can still get decent returns.
Indeed, that's the primary power of value investing. When a company's share price is low enough relative to investors' expectations, the business doesn't have to deliver stellar growth to provide great returns for its shareholders. All it has to do is deliver reasonable results and let the market do its thing over time.
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Value investing works because there's two parts to any company's stock market return: the part driven by its operational performance and prospects, and the part driven by the market's sentiment. When the market sours on a company and prices it at less than what's justified by its operations, investors have the opportunity to get a bonus return over time as that sentiment recovers.
The thing is, though, that you'll never know when the market's perspective on a company will change. As a result, once you find a company that looks like a legitimate value, it often makes sense to invest something in it, even if you're holding some money in reserve for the hope of an even better price.
So if you're interested in Chubb for what it could bring to you as a value-priced stock, today is a great day to take a deeper look at it. If its operations deliver anywhere close to as well as what analysts expect of it over time, the market's sentiment could very well turn much more positive.
