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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (15208)	8/15/2002 8:34:47 PM
From: Paul Senior	Respond to of 78602

I'll address this one to myself since maybe it's beating a dead horse to everybody else -g- I'm looking at AFC now because it shows up on the new lows list. Book value: approx. $45/sh current price: $23.36 moneycentral.msn.com Lehman says about it, "Our $38 price target (ed. '03) reflects our belief that Allmerica's sustained return on equity is probably in the 5-7% range, excluding the recent exceptionally weak stock market's affect on Allmerica's variable annuity earnings." It looks like Lehman expects AFC to earn $2.70 and trade at a p/e somewhat higher than Lehman's calculation of AFC's five year avg. p/e of 12.5. On a book value basis, AFC has traded about 125% of book (5yr avg., per Lehman), so Lehman would have a target of seeing AFC sell for 38/45 or roughly 80% of book value. (I'm assuming any book value growth to and through '03 doesn't materially affect the conclusions.) In my opinion, this is a typical regression-to-mean kind of stock analysis where one assumes there will be earnings (here $2.70 which is 6% ROE on $45 book value), and one assumes that investors will bid up the stock to a higher "investor ROE" than the company's ROE. 2.70/38 being a 7.1% return (equivalent to a p/e of 14). Lot of iffs here, but possibly achievable. The current price to stated book value (23 vs. 45) is uncommonly low for an insurance company. I'll add AFC to my watch list.