• If you are wondering whether Palomar Holdings at around US$124 per share still offers value, this article walks through what the current price might be implying.
• The stock has eased back recently, with a 2.2% decline over the last week and a 5.8% decline over the last month. However, the 1 year return sits at 16.1% and the 3 year return is very large at about 7x.
• Recent coverage around Palomar has focused on the company's position in specialty insurance and how investors are reacting to changing risk appetite in that space. This context helps explain why the share price has pulled back in the short term while still sitting well above levels from a few years ago.
• Our valuation checks give Palomar Holdings a score of 3 out of 6, which puts it in the middle of the pack and raises fair questions about whether the current price is justified. Next we will compare different valuation approaches to see what they suggest for Palomar, then finish with a simple way to get an even deeper read on the stock's valuation story.

Approach 1: Palomar Holdings Excess Returns Analysis

The Excess Returns model asks a simple question: after covering the cost of equity, how much profit is left over for shareholders each year, and what does that stream of “extras” add up to per share today?

For Palomar Holdings, the model uses a Book Value of $33.14 per share and a Stable EPS of $10.39 per share, based on weighted future Return on Equity estimates from 5 analysts. The implied Cost of Equity is $3.33 per share, which leaves an Excess Return of $7.05 per share. That excess is supported by an Average Return on Equity of 21.67% and a Stable Book Value estimate of $47.92 per share, sourced from 6 analysts.

These inputs are used to project future excess returns and discount them back to today, producing an estimated intrinsic value of about $238.74 per share. At a current share price around $124, the Excess Returns model indicates Palomar is about 48.0% undervalued.

Result: UNDERVALUED

Our Excess Returns analysis suggests Palomar Holdings is undervalued by 48.0%. Track this in your watchlist or portfolio, or discover 871 more undervalued stocks based on cash flows.

Approach 2: Palomar Holdings Price vs Earnings

For a profitable company like Palomar Holdings, the P/E ratio is a straightforward way to think about what you are paying for each dollar of earnings. Investors usually accept a higher P/E when they expect stronger earnings growth or see the business as lower risk, and a lower P/E when growth expectations are modest or risks are higher.

Palomar currently trades on a P/E of 18.72x. That sits above the Insurance industry average of 13.37x and also above the peer group average of 16.52x, which on simple comparisons might look relatively expensive.

Simply Wall St’s Fair Ratio takes this a step further. It estimates what a “normal” P/E should be for Palomar given factors such as its earnings growth profile, profit margins, industry, market cap and risk characteristics. For Palomar, the Fair Ratio is 15.19x, which is lower than the current 18.72x P/E. On this framework, the shares screen as overvalued on an earnings multiple basis.

Result: OVERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1422 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Palomar Holdings Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, a simple way for you to put your own story about Palomar Holdings into numbers by setting your view of fair value and your expectations for future revenue, earnings and margins.

A Narrative connects three things in one place: what you think is happening with the business, how that translates into a forecast, and what that implies for a fair value that you can compare to today’s share price.

On Simply Wall St, Narratives sit inside the Community page. Millions of investors use them as an easy tool to see whether their Fair Value is above or below the current Price, which can help them decide if they want to buy, hold, or sell.

Because Narratives update automatically when new earnings, news or other data arrives, your view on Palomar can adjust in real time without you having to rebuild your whole model.

For example, one Palomar Narrative might assume a higher fair value based on strong specialty positioning, while another might set a much lower fair value because the author is more cautious about risk appetite in the insurance space.

Do you think there's more to the story for Palomar Holdings? Head over to our Community to see what others are saying!

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.