What Assured Guaranty’s Recent Performance Tells Investors

Assured Guaranty (AGO) has drawn fresh attention after a period where the share price showed a 4.3% decline over the past month and a 9.1% decline over the past 3 months, inviting a closer look at current valuation and fundamentals.

While the recent 30 day and 90 day share price returns of 4.3% and 9.1% declines suggest fading momentum in the short term, the 1 year and 5 year total shareholder returns of 8.4% and 100.6% point to a much stronger longer term picture.

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With Assured Guaranty trading at $81.62, alongside an estimated intrinsic discount of 57% and a 29.6% gap to the analyst price target, the key question is whether this represents a buying opportunity or whether potential future growth is already reflected in the share price.

Price-to-Earnings of 7.3x: Is It Justified?

On a simple P/E basis, Assured Guaranty at $81.62 screens as cheaper than much of the US insurance space, yet not cheap relative to its own fair-value benchmark.

The P/E ratio compares the share price with earnings per share and is a quick way to see how much investors are paying for each dollar of profit. For Assured Guaranty, a P/E of 7.3x sits below both the US insurance industry average of 11.4x and a peer group average of 10.7x. This points to a lower earnings multiple than many comparable names.

However, when set against the estimated fair P/E of 6.4x, the current 7.3x looks relatively full. This suggests the market may already be assigning a richer multiple than that fair ratio implies. If the market were to move closer to that 6.4x level over time, it would reflect a lower price being attached to the same level of earnings.

Result: Price-to-Earnings of 7.3x (ABOUT RIGHT)

However, there are still risks that could challenge this picture, including weaker net income growth and any adverse credit events affecting insured public or structured finance exposures.

Another View: Cash Flows Paint a Different Picture

The earnings based view suggested Assured Guaranty is roughly fairly valued at a P/E of 7.3x, slightly above its 6.4x fair ratio. Yet our DCF model points to an estimated future cash flow value of $191.67 per share versus the current $81.62 price, implying the shares trade at a 57.4% discount. That is a very different message, so which signal do you put more weight on as an investor?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Assured Guaranty for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 62 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

If this mix of potential risks and rewards feels finely balanced, treat it as a prompt to review the numbers yourself and move quickly to form an independent view using the 4 key rewards and 3 important warning signs

Ready to hunt for more investment ideas?

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• Get ahead of the crowd by using a screener containing 25 high quality undiscovered gems before they attract wider market attention.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.