Finance Essays – Stock QBE Price

Stock QBE Price

Stock rating of QBE

This essay evaluates the fiscal public presentation of QBE ‘s portion and if its portions are over or under valued. The undermentioned analysis considers price reduction rate, linkage between monetary value and net incomes, consequence of growing rates on the portion monetary value, measuring of hazard of the company and the influence of portion on a portfolio.

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Fiscal public presentation of QBE

QBE Insurance Group Limited is one of the largest listed insurance companies in Australia. It is a well-managed historical Australian general issuer and has delivered good and steady growings both in its operation and net incomes in the past few old ages ( QBE 2008 ) .For the half twelvemonth ended 30 June 2008, it is highlighted in its fiscal study that QBE has a pleasing profitableness accomplishment compared to the past twelvemonth ( Appendix 1 ) .

QBE ( 2008 ) ( Appendix 1 ) reported that insurance net income had increased by 6 % to $ 1116 million in its income statement. The figure amounting to $ 920 million indicated a 7 % addition in the net income after revenue enhancement before capital losingss on equities, but this figure was down to $ 859 million, stand foring a 7 % diminution from 2007 after the capital losingss were included. In the Balance sheet, entire assets had a somewhat lessening to $ 39144 million for this half twelvemonth while entire liabilities was reduced significantly by $ 800 million to $ 30270 million.

61 cents of interim dividend will be paid in September, which creates a highest record in the company ‘s history. Cash flow from operating activities had a dramatic addition from $ 785 to $ 839 dollar. Many cardinal ratios such as combined runing ratio and the insurance net income border indicated an accomplishment in strong insurance profitableness. On the other manus, an addition in big inevitable hazard and ineluctable claim is besides presented ( Appendix 2 ) .

Though the QBE ‘s fiscal study demonstrates sound development, trusting on the fiscal statements merely is non plenty to give the investors an in-deep position about whether the company is deserving puting in. Therefore, it is necessary to measure the company ‘s value and carry on a fiscal analysis by utilizing basic fiscal techniques.

The price reduction rate which should be used in your analysis

A figure of methods can be used to value companies and their stocks. One of theoretical theoretical accounts is dividend price reduction theoretical account. This theoretical account lies in the present value regulation ( Damodaran 2002 ) . The price reduction rate in this theoretical account is known as the risk-adjusted rate or cost of equity capital at which hereafter expected dividends price reduction, doing the stock monetary value peers to show value of those future dividends ( Kolb & A ; Rodrigez 1996 ) . In order to take a proper price reduction rate, some possible equations for appraisal are considered as below,

1. Weighted Average Cost of Capital

The company cost of capital is a leaden norm of the returns demanded by the proportion of assorted types of duties for the investorsdebt, preferable stocks, and common stocks that are issued to finance the company ‘s operations and investings ( ValuePro n.d. ) .

The expression for WACC is given as.

From the company ‘s balance sheet in 2007 ( Appendix 3 ) , the debt was $ 31070 million and it can be computed that the value of common stocks was $ 7392 and preferable stocks were deserving $ 1295 million, which made up of the entire market value of QBE to $ 39613 million. The debt holders required a rate of return of 6.5 per centum while the expected rate of return on the common and preferable stocks was 26.1 and 6.8 per centum, severally. Based on the day of the month above and 24 % corporate revenue enhancement rate, WACC of QBE is calculated as 9.87 % .

2. Capital plus pricing theoretical account

CAMP is one of the commonly used theoretical accounts to mensurate the relationship between market hazard and expected return. The expected return of a stock linearly relates to put on the line on security market line, as measured by beta ( Kolb & A ; Rodrigez 1996 ) .The basic equations of CAPM isR = Rdegree Fahrenheit+I? ( Rm– Roentgendegree Fahrenheit).

From the historical record of Reserve Bank of Australia ( 2008 ) ( Appendix 5 ) , 90 Day Bank Accepted Bill rate is averaged at 7.36 % for the past 12 months, which can be used as market riskless rate. The 1 twelvemonth expected return on S & A ; P/ASX 200 Market portfolio is 16.74 % , ensuing in 8.71 % market hazard premium. Give a beta of QBE estimated at 0.6749 ( Appendix 4 ) , the excepted return on QBE is 13.24 % .

3. Changeless dividend growing theoretical account

Under the changeless growing premise, the expected rate of return of a portion can be calculated after rearranging the constant-growth expression () .

Analysts assumed QBE would turn at approximately 5.8 % in the following period ( Appendix ) ; the mean monetary value of the company for the past 12 months was $ 28.47. With such a growing rate, the company tends to pay a dividend of 129 cents at the terminal of 2008 in footings of 122 cents paid in 2007. Therefore, the expected rate of return is calculated as 10.33 % .

Since the equations and informations are based on company existent information and the existent market status alternatively of premises, price reduction rate calculated by utilizing WACC or CAPM is more preferred to be used in the analysis.

Linkage between portion monetary value and net incomes per portion

To see whether there is a nexus between portion monetary value and net incomes per portion, P/E ratio is widely used and it is a good rating metric in today ‘s stock market. P/E ratio is merely the portion monetary value of a corporation divided by its gaining per portion. And it can be helpful to find if the single stocks are moderately priced ( Trading Critic2006 ) .

Taking QBE ‘s mean monetary value of $ 23.90 from the first eight months of 2008 and a approximative prognosis of 231.5 cents gaining per portion at the terminal of 2008 ( Appendix ) , so it can be calculated that QBE has the mean P/E ratio10.3 during this period.

The P/E ratio tells a investor the market position about a stock and looks at how stock monetary value is related to the company ‘s net incomes ( Badami n.d. ) . By and large, P/E ratio is non frequently used entirely and analysts prefer to compare the P/E ratios of similar comparable companies in order to determine the market value of the stock relation to another ( Frino et al. 2004 ) .

In the undermentioned tabular array, the comparing of P/E ratios for QBE and the Insurance Australia Group Limited ( IAG ) are presented:

Table1: P/E ratios for QBE and IAG, 2007-2008

QBE

IAG

EPS ( cents )

PRICE ( $ )

P/E ratios

EPS ( cents )

PRICE ( $ )

P/E ratios

2007

217.3

25.82

10.7

36.1

4.15

11.5

2008

229.9

23.90

10.4

8.0

4.18

52.2

( Beginning: InvestSMART 2008 )

Given that QBE and IAG are both largest insurance companies in Australia and both are listed in the top 200 stocks in ASX, a sensible premise that they are comparable can be made. From the tabular array, it can be seen that although the P/E ratio was near in 2007 for these two companies, it has non been the instance in 2008.

Using historical EPS Numberss, a comparing of the P/E ratios would bespeak that one stock is comparatively under-priced by the market while the investors were paying excessively much attending to another. In 2008, IAG has a P/E ratio five times that of QBE, bespeaking that IAG portions were comparatively overpriced and QBE was comparatively under priced by the market ( Frino et al. 2004 ) . In this instance, QBE is a more attractive investing because lower P/E ratio means higher future net incomes are expected compared with the recent one-year net incomes ( Maranjian S 2007 ) .

However, a low P/E ratio does non ever denote success since higher P/E ratio suggests that the investors think that the company has better growing chances ( Brealey, Myers & A ; Marcus, 2007 ) .

P/E does non intend everything. Despite a linkage between monetary value and EPS, the earning of the company is non the lone finding factor on portion monetary value ‘s public presentation. Therefore, other factors are normally considered before they make any investing determination.

Different growing rates effects on the portion monetary value

As can be seen in the dividend price reduction theoretical account, today ‘s stock monetary value depends on the future dividends. Since growing rate closely relates to the dividend distributed, it frequently has impacts on the portion monetary value. In the undermentioned analysis, two utmost instances of the dividend theoretical account will be compared to see the consequence of growing rates on QBE ‘s monetary value:

Zero-growth theoretical account

When a company pays out all the earning to the stockholders, it could non turn as it does n’t hold the ability to reinvest. Then dividend being paid is the same everlastingly so that they are considered as sempiternity ( Brealey, R, Myers, S & A ; Marcus, A 2007 ) .

Assume QBE has no growing in its concern in 2008 ; as a consequence, in the hereafter it will hold the same gaining per portions 217.3 cents as 2007 and all of them are traveling to be paid as dividends. Using the WACC 8.46 % as the price reduction rate, the curries stock monetary value is deserving $ 25.69.

Constant-Growth Model

In world, it is non easy to gauge the future dividends for the every twelvemonth. An premise that dividends grow at a changeless rate simplifies the dividend price reduction theoretical account and makes it more convenient to value the monetary value of the stock ( Frino et al. 2004 ) .

Base on the company operating and fiscal public presentation of QBE, analysts estimate a 5.8 % growing in the dividends and presume that the investors expect this rate will be fixed each twelvemonth in the long term. The expected dividend to be paid in the following period is expected to be 129 cents. Discounted at WACC 9.87 % , the portion monetary value of QBE should be deserving $ 32.94 today.

From the above computations, consequences from the two different theoretical accounts differ from each other. A higher growing rate in dividends will ensue in a higher stock monetary value today. Given the present dividend and the price reduction rate are the same, the higher the expected dividend growing rate, the higher the current stock monetary value. In other words, there is a direct relationship between monetary value and growing. If the company has no growing in its earning or dividends, the monetary value will stay the same forever. In contrast, since there is a steady rate in the growing, portion monetary value will be go uping invariably harmonizing to the hereafter turning dividends.

Measurement of the hazard

As the stock market is known to be one of the riskiest investing markets, analysing hazard is particularly helpful for the investors and stockholders to happen out an appropriate balance between hazards and return ( BNY Mellon, 2008 ) . To see the grade of hazard that QBE is subjected to, a measuring of hazard can be evaluated based on some utile indexs.

1. Beta

Beta is one of the most popular statistical steps of hazard, which is the cardinal constituent in building the CAMP ( McClure 2008 ) . It represents the incremental hazard added in a given portfolio and it besides measures volatility of the stock in relation to the mention index ( Yahoo! UK Limited. 2008a ) .

Compared to beta of ASX market and insurance sector ( 1.04 and 0.98 severally ) , QBE presently has a beta of 0.6794, bespeaking a comparatively low degree of sensitiveness of QBE ‘s portion to the overall market and sector fluctuations ( Fernandez 2002 ) . A low beta non merely suggests that the stock possesses a lower lever of hazard but besides a lower expected return. ( McClure 2008 )

2. Expected rate of return

Using CAMP, the expected return on QBE is 13.24 % while market return of S & A ; P/ASX 200 is presently 16.07 % . Although it is lower than the market return, a direct relationship between hazard and return indicates that the hazard accompanied with the high expected return can non be ignored and stockholders must be careful.

3. Standard divergence and Volatility

A portion ‘s volatility is normally a hazard index for both the portion ‘s market hazard and diversifiable hazard ( Fernandez 2002 ) . On day-to-day returns base, volatility is calculated by utilizing standard divergences and it measures the stock variableness in relate to the overall market ( Yahoo! UK Limited. 2008b ) . If a portion ‘s volatility is high, it implies that portion ‘s future return may change within a comparatively wide scope and frailty versa ( Fernandez, P 2002 ) . A comparatively high Quarterly Volatility of 41.1075 % indicates that a high varianation of the portion monetary value from the expect value is presented at the minute.

4. Other indices

QBE has a negative 8.1277 % comparative public presentation and a positive 0.9994 comparative strength, stand foring that the stock has a worse public presentation than that of the index this twelvemonth, but it is good to see over clip this has become less and less ( Yahoo! UK Limited. 2008c ) .

Non-market hazard

Some of hazards are the firm-specific hazards and they are diversifiable and can be reduced or eliminated, which is known as non-market hazard ( Damodaran 2002 ) . QBE has the following hazard classs: Acquisition hazard, Operational hazard, and Capital and regulative hazard. Although hazard direction has been established and administered in the company, non-market hazard still exists in QBE ‘s operations since new hazard frequently appears under different economic conditions and covering with hazard is a long-run undertaking for the company ( QBE 2008 ) .

There is no uncertainty that investors ever like high expected return and low criterion divergence or Volatility ( Brealey, & A ; Myers 2003 ) .From the measuring of cardinal indexs, QBE provides a comparatively high expected rate of return while a high volatility is presented. This is non optimum. Therefore, a certain high degree of hazard is involved in QBE due to the factors of market and the company itself.

Is the portion over-valued or undervalued?

Determining if a portion is undervalued or overvalued frequently gives investors a positive judgement on the company as investors ever want to happen out the appropriate clip to purchase or sell the portion. However, measuring what the “ right ” value is for a portion is ever hard ( Schoen 2003 ) .Generally, several indexs of the company can be utile tools for the stock rating.

1. P/E ratio 1. P/E ratio

Since P/E ratio demonstrates how a company ‘s market monetary value compares to its net incomes per portion, it becomes a popular and often used tool to see if the stock is over or under priced. From the old analysis, P/E ratio is calculated as 10.4 % and it has comparatively under-priced relation to another insurance company IAG.

It is besides available to Compare QBE ‘s P/E ratio to those of the market and insurance sector ( 11.91 and 16.07 severally ) ( Appendix ) ,

Based on these informations, a low P/E ratio represents the company is undervalued.

Comparing with

2. Intrinsic value V.S. market monetary value

From the dividend price reduction theoretical account, mean portion monetary value of QBE is about calculated as $ 32.94 while in fact, the monthly mean monetary value is about $ 24.32.

Many analysts perceive EPS growing rate as a much more relevant tool for finding whether a company is undervalued or overvalued. As the company grows at such a steady rate in the insurance industry, it can be concluded that the public presentation of portion is under-priced.

The current

The figure below show the historical monetary value public presentation compared with ASX 200 and insurance sector.

As can be seen from the diagram, the monetary value kept falling for the past few months. The monetary value line was ever under the sector and ASX line since January of 2008. A usually evaluated stock will travel and fluctuate around the market. Harmonizing to the operational strength and market portion of the company, the monetary value should hold non execute As can be seen from the diagram, the monetary value kept falling for the past few months. The monetary value line was ever under the sector and ASX line since January of 2008. A usually evaluated stock will travel and fluctuate around the market. Harmonizing to the operational strength and market portion of the company, the monetary value should hold non execute

It can be estimated that the stock is under public presentations due to some unsure factors

An undervalued stock is defined as a stock that is selling at a monetary value significantly below what is assumed to be its intrinsic value ( finance ) .The portion of QBE has characteristic of low P/E ratio and under-pricing.A overall decision can be made on the QBE that its portion is undervalued.

What influence would you anticipate your portion to hold on the public presentation of a portfolio?

It is known that building a portfolio is a good investing scheme to distribute the hazard of single stocks since specific stock ever has an influence on the overall public presentation of the portfolio due to its allotment, ain hazard and expected return ( Forsythe 2008 ) .In the undermentioned illustration, the impact of QBE ‘s portion on a portfolio will be discussed.

Suppose an investor has a stock portfolio consisting three different portions — Telecom Corporation of New Zealand Limited ( TEL ) and Woolworths Limited ( WOW ) , Compared to QBE, TEL and WOW are two comparatively less hazardous stocks because they have lower beta and lower Quarterly volatility than QBE. The tabular array given below shows the relevant information of these three companies:

Table 2: Detailed Data for QBE, TEL and WOW

Stock

Beta

Expect return

Quarterly Volatility

( standard divergence )

QBE

0.6749

13..24 %

41.11 %

TEL

0.3112

10.07 %

32.69 %

Belly laugh

0.5514

12.16 %

31.26 %

( Beginning: Yokel! 7 2008 )

To give an in-depth analysis to the investors, three scenarios in footings of the different proportion allocated on QBE in this portfolio are compared:

Scenario1: QBE 90 % , TEL 5 % , WOW 5 % .

Assume the investor invested 90 per centum of his financess in QBE and every bit 5 per centum in both TEL and WOW in the portfolio. ( Scenario2 and 3 are in similar logic ) In this instance, the portfolio expected return is calculated as 13.03 % and standard divergence is 37.07 %

Scenario2: QBE 50 % , TEL 25 % , WOW 25 %

Portfolio expected return is 12.18 % and standard divergence is 23.46 %

Scenario3: QBE 10 % , TEL 45 % , WOW 45 %

Expected rate of return on the portfolio is 11.33 % and standard divergence is 17.76 % .

The information from three scenarios are summarized by the undermentioned column and line graph:

Figure 2: Weight of QBE, portfolio expected return and Quarterly Volatility

The figure illustrates that there is a falling tendency on the expected return and the standard divergence of the portfolio against the degressive degrees on QBE ‘s weight. If a big per centum of QBE ‘s portion is allocated, the overall portfolio has high expected return and high criterion divergence, which is reasonably near to the conditions of QBE.

When QBE accounts for half of the entire investing, the portfolio expected return diminutions to 12.18 % and standard divergence beads dramatically by 36.71 % to 23.46 % . For the degree of 10 % weight of QBE ‘s portion, the portfolio reaches the lowest degree of expected return and standard divergence. It can be concluded that QBE plays a important function on the public presentation of the overall portfolio while it takes up a big part, doing the portfolio go more hazardous. In contrast, this hazard is well spread by the other two low-risk portions as QBE merely occupies a little proportion in the portfolio. Under this circumstance, the little weight of QBE does non impact much on the portfolio and variegation lead to a success of riddance in hazard ( Fernandez 2002 )

Decision: From the above analysis, it can be found that QBE has a outstanding public presentation in operation and it develops a steady growing potency during these few old ages. It provides a high expected return

Furthermore, P/E ratio and the intrinsic value of the portion suggest that its monetary value is under-valued.

Overall, it is deserving to put in QBE owing to a comparatively good rating on the the company ‘s existent value and development but hazard affecting the portion must be awared and it can non be overlooked when doing determinations.

Recommendation: In the short tally, although there is a monetary value fluciation,

For longer term investors, QBE is an first-class stock for inclusion in the portfolio since growing scheme of the company has deliver good and extended hazard direction are implemented successfully ( Yahoo! 2008 ) .

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