ALLEGHANY CORP Y
March 01, 2010 - 8:07am EST by
rab
2010 2011
Price: 276.00 EPS $30.43 $25.00
Shares Out. (in M): 9 P/E 9.0x 11.0x
Market Cap (in $M): 2,447 P/FCF 9.1x 9.1x
Net Debt (in $M): -825 EBIT 340 340
TEV ($): 1,622 TEV/EBIT 4.8x 4.8x

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Description

Alleghany Corporation is currently selling for 0.90x Price/Book, it's lowest P/B in 15 years despite reporting solid results (reported 2009 last night) and holding record levels of cash per share ($825mm, or $93 per share of "net cash" at the parent level. Adjusted for cash, Alleghancy is the cheapest its been by a wide margin and the business is doing quite well. The company carries only $145mm of Goodwill so Tang BV = 95% of stated book value.

 

The lowest P/B since 1995 occurred in 2009, when Alleghany declined to $221 in March 2009. At that point, Allegheny was selling for 0.80x prior year-end BVPS, an all-time low. The average low = 1.19x and the average high = 1.52.  I would suggest that a 1.3-1.4x P/B is very reasonable to assume in 2010 or 2011.  If Alleghany generates an 8% ROE in 2010, EPS = $24 and 12/31/10 BVPS = $331, suggesting a Price of $430-$460 as some point in calendar 2011. Given that the average high P/B = 1.52 and the market COULD begin hardening at some point in the next 18 months, my numbers could be conservative. Either way, $430-$460 implies 56-67% upside over the next 12-18 months, which I view as highly compelling given the conservative nature of this company, aligned management and excess capital of $93 per share.

 

The market generally views Alleghany as a "sleepy" BVPS growth insurance story. While there is some truth to this statement, the company has quickly amassed a large net cash pile ($93 per share) and will have significant flexibility to either return cash to owners or acquire businesses going forward. Meanwhile, investors who buy Alleghany today are getting the company for a 15-year P/B low, a record balance sheet and the potential for a hardening market. The odds of success from owning Alleghany would seem highly skewed in one's favor.

 

Alleghany Corporation (Y) is a Berkshire Hathaway-like company that operates three insurance subsidiaries, primarily in the specialty, P&C and worker's compensation sectors. Alleghany has a long track record of value creation by building, acquiring and selling businesses with particular expertise in the insurance, investment management and natural resources areas. Alleghany has been profitable every year and usually produces an underwriting profit. The company also reserves conservatively, usually releasing reserves after its year-end actuarial analysis.

 

Alleghany continues to grow its $4.5bn investment portfolio. This portfolio is about 70% high quality fixed income, 20% equities (with heavy energy exposure). Both the CEO and CFO are CFAs and allocate capital like portfolio managers. Alleghany employs a total return approach to investing its float and generated total returns of equity portfolio returns of 8.8% per year over the past five years versus -2.2% for the S&P.

 

The company has a history of 6-18% ROE with an average ROE of 8%. BVPS increased 117% from 2000-2008 but declined 5% in '08 due largely to equity portfolio losses and large losses from Hurricane Ike. Insurance operations are currently solidly profitable due to fewer catastrophes BUT pricing is very competitive.

 

While the insurance subsidiaries are posting solid results currently, pricing remain weak and competition is intense. At some point, pricing will improve, but it will probably take some elevated loss experience or consolidation to make this happen.

 

Alleghany is a long-term "book value growth" story, as management's goals and compensation are squarely lined up with BVPS growth. I think that one of the reasons that market has ignored Alleghany in 2009/2010 is due to "impatience." Most investors are so focused on beating the market quarter to quarter and these same investors understand that Alleghany is a long-term book value growth story, thus providing short-term investors no real catalyst to buy the stock. Alleghany's approach is to manage for increases in book value, not revenues, nor market share, nor increasing profits, thus during periods of attractive pricing, the company writes a lot of insurance. During periods of soft pricing like the current one, the company writes a fair amount less. Alleghany's stock price performance has not been that dissimilar from Berkshire Hathaway.

 

Management
CEO Weston Hicks, CFA, spent his pre-Alleghany career in investment management. The company's CFO also has his CFA. They run the business very much like Warren Buffett runs Berkshire. Weston and the CFO make investment portfolio and capital allocation decisions while delegating the day-to-date insurance business operations to subordinates. As noted above, Alleghany's investment results have exceeded those of the broader market by 10 percentage points per year over the past five years.

 

 

 

Catalyst

Recent earnings release highlighting strong performance, BVPS growth and excess cash position.

Large one-time dividend or accretive acquisition.

 

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    Description

    Alleghany Corporation is currently selling for 0.90x Price/Book, it's lowest P/B in 15 years despite reporting solid results (reported 2009 last night) and holding record levels of cash per share ($825mm, or $93 per share of "net cash" at the parent level. Adjusted for cash, Alleghancy is the cheapest its been by a wide margin and the business is doing quite well. The company carries only $145mm of Goodwill so Tang BV = 95% of stated book value.

     

    The lowest P/B since 1995 occurred in 2009, when Alleghany declined to $221 in March 2009. At that point, Allegheny was selling for 0.80x prior year-end BVPS, an all-time low. The average low = 1.19x and the average high = 1.52.  I would suggest that a 1.3-1.4x P/B is very reasonable to assume in 2010 or 2011.  If Alleghany generates an 8% ROE in 2010, EPS = $24 and 12/31/10 BVPS = $331, suggesting a Price of $430-$460 as some point in calendar 2011. Given that the average high P/B = 1.52 and the market COULD begin hardening at some point in the next 18 months, my numbers could be conservative. Either way, $430-$460 implies 56-67% upside over the next 12-18 months, which I view as highly compelling given the conservative nature of this company, aligned management and excess capital of $93 per share.

     

    The market generally views Alleghany as a "sleepy" BVPS growth insurance story. While there is some truth to this statement, the company has quickly amassed a large net cash pile ($93 per share) and will have significant flexibility to either return cash to owners or acquire businesses going forward. Meanwhile, investors who buy Alleghany today are getting the company for a 15-year P/B low, a record balance sheet and the potential for a hardening market. The odds of success from owning Alleghany would seem highly skewed in one's favor.

     

    Alleghany Corporation (Y) is a Berkshire Hathaway-like company that operates three insurance subsidiaries, primarily in the specialty, P&C and worker's compensation sectors. Alleghany has a long track record of value creation by building, acquiring and selling businesses with particular expertise in the insurance, investment management and natural resources areas. Alleghany has been profitable every year and usually produces an underwriting profit. The company also reserves conservatively, usually releasing reserves after its year-end actuarial analysis.

     

    Alleghany continues to grow its $4.5bn investment portfolio. This portfolio is about 70% high quality fixed income, 20% equities (with heavy energy exposure). Both the CEO and CFO are CFAs and allocate capital like portfolio managers. Alleghany employs a total return approach to investing its float and generated total returns of equity portfolio returns of 8.8% per year over the past five years versus -2.2% for the S&P.

     

    The company has a history of 6-18% ROE with an average ROE of 8%. BVPS increased 117% from 2000-2008 but declined 5% in '08 due largely to equity portfolio losses and large losses from Hurricane Ike. Insurance operations are currently solidly profitable due to fewer catastrophes BUT pricing is very competitive.

     

    While the insurance subsidiaries are posting solid results currently, pricing remain weak and competition is intense. At some point, pricing will improve, but it will probably take some elevated loss experience or consolidation to make this happen.

     

    Alleghany is a long-term "book value growth" story, as management's goals and compensation are squarely lined up with BVPS growth. I think that one of the reasons that market has ignored Alleghany in 2009/2010 is due to "impatience." Most investors are so focused on beating the market quarter to quarter and these same investors understand that Alleghany is a long-term book value growth story, thus providing short-term investors no real catalyst to buy the stock. Alleghany's approach is to manage for increases in book value, not revenues, nor market share, nor increasing profits, thus during periods of attractive pricing, the company writes a lot of insurance. During periods of soft pricing like the current one, the company writes a fair amount less. Alleghany's stock price performance has not been that dissimilar from Berkshire Hathaway.

     

    Management
    CEO Weston Hicks, CFA, spent his pre-Alleghany career in investment management. The company's CFO also has his CFA. They run the business very much like Warren Buffett runs Berkshire. Weston and the CFO make investment portfolio and capital allocation decisions while delegating the day-to-date insurance business operations to subordinates. As noted above, Alleghany's investment results have exceeded those of the broader market by 10 percentage points per year over the past five years.

     

     

     

    Catalyst

    Recent earnings release highlighting strong performance, BVPS growth and excess cash position.

    Large one-time dividend or accretive acquisition.

     

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