IS, I think UAI does look interesting. You've correctly identified the valuation as being extreme.
marketguide shows that the price/book in this sector, casualty insurance, is typically 2.86.
yahoo.marketguide.com
UAI has a book value of $3.80, which would put the fair price at 2.86 X 3.8 = 11.
Friday the stock closed at 27, which is 150% higher than 11.
However, the over-valuation is even more extreme than this analysis shows, because the book value for this company is low quality. Unlike most peer companies, UAI's book value consists mostly of intangible assets.
Here's how I discovered this: When I checked the UAI financial statements, I saw that most of the book value is attributable to an asset called "customer lists". This was new to me -- I've never seen an asset with this name. So I was suspicious.
I'm not familiar with the insurance industry, so I checked the balance sheets of 5 peer companies listed in the MarketGuide link above, and not one of them had "customer lists" for an asset. Not even as a small asset. For most of them, investment securities were their biggest asset, but UAI has "customer lists" as its biggest asset. That's smelly.
Looking at UAI's 10k, the explanation given for "customer list" appears to be what would ordinarily be called "goodwill", i.e., the intangible asset that gets listed on a company's balance sheet when it takes over another co. for more than its net tangible assets.
That means that unlike most insurance companies, UAI's book value is primarily intangible assets. It isn't a quality book value. So UAI should trade at a lower price/book ratio than the industry average. It could very well trade down to a multiple of 1 (approximately the price they paid for the companies they acquired). So instead of a fair value of 11, I would put the fair value somewhere between 3.80 and 11.
I also noticed that UAI has a small and unfamiliar auditor.
I wonder how this thing got to have a market cap of $1 B?
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the above is a repost of
Message 10552060 |
