Rating Update: Stock Rating C-Neutral (11/4/19)-Cincinnati Financial Corp (CINF).

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BUSINESS

Cincinnati Financial Corporation provides property casualty insurance products in the United States. The company operates in five segments: Commercial Lines Insurance, Personal Lines Insurance, Excess and Surplus Lines Insurance, Life Insurance, and Investments. The Commercial Lines Insurance segment provides coverage for commercial casualty, commercial property, commercial auto, and workers’ compensation. It also offers director and officer liability insurance, contract and commercial surety bonds, and fidelity bonds; coverage for property, liability, and business interruption; and machinery and equipment coverage. The Personal Lines Insurance segment provides personal auto insurance; homeowners insurance; and dwelling fire, inland marine, personal umbrella liability, and watercraft coverages to individuals.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be below the cost of capital, CINF is expected to continue to be a modest Value Eraser.

Cincinnati Financial has a current Value Trend Rating of C (Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Cincinnati Financial has a very low Appreciation Score of 9 but a very high Power Rating of 98, triggering the Neutral Value Trend Rating.

Cincinnati Financial’s stock is selling significantly above targeted value. The current stock price of $110.18 compares to targeted value 12 months forward of $42.
Cincinnati Financial’s very low appreciation potential results in an appreciation score of 9 (91% of the universe has greater appreciation potential.)
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Cincinnati Financial has a Power Rating of 98. (This very high Power Rating indicates that CINF has a better chance of achieving attractive investment performance over the near to intermediate term than all but 2% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; the recent trend in CINF’s earnings estimates has been favorable; and is in a strong phase current.

INVESTMENT PROFILE

CINF’s financial strength is above average. Financial strength rating is 69.
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Relative to the S&P 500 Composite, Cincinnati Financial Corp has moderate Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that CINF is normal risk. Low financial leverage is a positive for CINF. Relative weaknesses include: low forecasted profitability, low historical profitability, and low expected growth. CINF’s valuation is moderate: moderate dividend yield, high P/E ratio, and moderate price/book ratio. CINF has low market capitalization.

CURRENT SIGNALS

Cincinnati Financial’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; and falling tax keep rate.

Cincinnati Financial’s current technical position is very strong. The stock price is in a 15.4 month up move. The stock has appreciated 75.6% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Important positive changes in Cincinnati Financial Corp (NASDAQ: CINF) fundamentals have recently occurred: significant quarterly sales acceleration occurred, the consensus estimate for December, 2019 increased significantly, and significant quarterly earnings acceleration occurred.
The stock is currently rated C.
Cincinnati Financial Corp (NASDAQ: CINF) stock closed at $1.00 on 11/4/19 after a major decline of -16.7%. This decline was accompanied by normal trading volume. The stock has declined -1.3% during the last week but has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2018, Cincinnati Financial generated a significant increase in cash of +$200.0 million (+17%). Sources of cash were larger than uses. Cash generated from 2018 EBITDA totalled +$335.0 million. 2018 non-operating sources contributed no cash. Cash taxes consumed -$82.0 million (-24% of EBITDA). Withdrawal of investment from the business totalled +$682.0 million (+204% of EBITDA). On a net basis, debt investors withdrew -$38.0 million (-11% of EBITDA) while equity investors pulled out -$697.0 million (-208% of EBITDA).
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CINF’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Cincinnati Financial Corp Peer Group as well. In most years, Cincinnati Financial was in the third quartile and second quartile. Currently, Cincinnati Financial is slightly above median at 0% of EBITDA ( $0.0 million).

CINF’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Cincinnati Financial Corp Peer Group. In most years, Cincinnati Financial was in the second quartile and top quartile. Currently, Cincinnati Financial is at median at -24% of EBITDA (-$82.0 million).

CINF’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Cincinnati Financial Corp Peer Group. In most years, Cincinnati Financial was in the top quartile and second quartile. Currently, Cincinnati Financial is upper quartile at +204% of EBITDA (+$682.0 million).

CINF’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Cincinnati Financial Corp Peer Group as well. In most years, Cincinnati Financial was in the third quartile and second quartile. Currently, Cincinnati Financial is slightly above median at -11% of EBITDA (-$38.0 million).

CINF’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cincinnati Financial Corp Peer Group. In most years, Cincinnati Financial was in the third quartile and second quartile. Currently, Cincinnati Financial is lower quartile at -208% of EBITDA (-$697.0 million).

CINF’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Cincinnati Financial Corp Peer Group. In most years, Cincinnati Financial was in the top quartile and third quartile. Currently, Cincinnati Financial is upper quartile at +60% of EBITDA (+$200.0 million).
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CINF’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Cincinnati Financial Corp Peer Group. In most years, Cincinnati Financial was in the third quartile and second quartile. Currently, Cincinnati Financial is at the upper quartile at +25%.

PROFITABILITY

CINF’s return on equity has improved modestly since 2009.
This modest improvement was due to little change in pretax operating return and small positive trend in non-operating factors.
The productivity of CINF’s assets remained stable over the full period 2009-2019: asset turnover has exhibited little to no overall change.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
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CINF’s return on equity is above median (9.8%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is upper quartile (4.5%) reflecting asset turnover that is slightly below median (0.26X) and upper quartile pretax margin (17.1%).
Tax “keep” rate (income tax management) is at median (82.8%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (2.64X).

GROWTH RATES

There are no significant differences between Cincinnati Financial’s longer term growth and growth in recent years.
Cincinnati Financial’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 5.4% per year.

Total asset growth has been 5.2% per year.

Annual E.P.S. growth has been 6.9% per year.

Equity growth has been 6.7% per year.

Cincinnati Financial’s consensus growth rate forecast (average of Wall Street analysts) is 1.9% — below the average of the historical growth measures.
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Relative to the Cincinnati Financial Corp Peer Group, Cincinnati Financial’s historical growth measures are generally second quartile. Equity growth (6.7%) has been slightly above median. Total asset growth (5.2%) has been above median. Revenue growth (5.4%) has been at median. E.P.S. growth (6.9%) has been below median.

In contrast, consensus growth forecast (1.9%) is lower quartile.
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PRICE HISTORY

Over the full time period, Cincinnati Financial’s stock price performance has been quite good. Between January, 2009 and November, 2019, Cincinnati Financial’s stock price rose +402%; relative to the market, this was a +35% gain. Significant price move during the period: 1) September, 2011 – September, 2019: +343%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 47.4% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of 47.4% is upper quartile relative to Cincinnati Financial Corp Peer Group.

Current 5-year total return performance of 21.2% is upper quartile relative to the S&P 500 Composite.
Through October, 2019, with upper quartile current 5-year total return of 21.2% relative to S&P 500 Composite, Cincinnati Financial’s total return performance is upper quartile relative to Cincinnati Financial Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, CINF’s overall valuation is low. The highest factor, the price/earnings ratio, is below median. Ratio of enterprise value/earnings before interest and taxes is below median. Ratio of enterprise value/revenue is below median. Price/equity ratio is at the lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.

Relative to Cincinnati Financial Corp Peer Group, CINF’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is above median. Price/equity ratio is above median. Price/earnings ratio is at median. Ratio of enterprise value/assets is at median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is below median.
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Cincinnati Financial has a very large value gap compared to the median. For CINF to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.72X to 1.95X. If CINF’s ratio of enterprise value/revenue were to fall to 1.95X, its stock price would be lower by $-30 to $80.
For CINF to achieve upper quartile valuation relative to the Cincinnati Financial Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.72X to 3.61X. If CINF’s ratio of enterprise value/revenue were to rise to 3.61X, its stock price would increase by $35 from the current level of $110.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be below the cost of capital, CINF is expected to continue to be a modest Value Eraser.
Cincinnati Financial’s current Price Target of $42 represents a -62% change from the current price of $110.18.
Cincinnati Financial’s very low appreciation potential results in an appreciation score of 9 (91% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 9, the high Power Rating of 98 results in an Value Trend Rating of C.
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Cincinnati Financial’s current Price Target is $42 (+4% from the 2018 Target of $40 but -62% from the 11/04/19 price of $110.18). This plateau in the Target is the result of a +4% increase in the equity base and a +0% change in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted increase in growth has no impact on the multiple. The forecasted increase in cost of equity also has no impact and the increase in return on equity didn’t either.
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PTR’s return on equity forecast is 7.1% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is above the 2010 low of 4%.

PTR’s growth forecast is 11.0% — above our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2011 and 2018. The current forecast is significantly above the 2011 low of 1%.

PTR’s cost of equity forecast is 8.9% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2010 and 2018. The current forecast is steady at the 2011 low of 7.5%.
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At Cincinnati Financial’s current price of $110.18, investors are placing a positive value of $31 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 5.0% per year, and a return on equity of 6.7% versus a cost of equity of 8.6%.
PTR’s 2020 Price Target of $42 is based on these forecasts and reflects an estimated value of existing assets of $165 and a value of future investments of $-123.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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