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Participant ○○○

CET / Plymouth Rock fair value

Just a thought in case anyone holds CET. It's held up really well this year; I estimate its NAV is probably down about 19% year-to-date as of yesterday, versus down 24% for the S&P 500. I wonder if part of the reason for this outperformance is the >20% position in Plymouth Rock being infrequently marked. If its value on the books has not changed since the start of the year, that might explain some of CET's good performance.

I'm not sure exactly how CET marks Plymouth Rock so this isn't a short idea. More something to think about if long. The end of CET's fiscal quarter is Tuesday next week. That seems like a probable time for Plymouth Rock to be fair valued. I expect the next NAV to be posted incorporating that fair value might be Friday next week and, if the market does not expect NAV to drop, the market reaction would be the following Monday.

For that reason, I swapped out of CET into another fund. It might also be worth thinking about other things that happen end of quarter.

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Explorer ○○

Re: CET / Plymouth Rock fair value

I think Plymouth Rock mainly does auto insurance. It is not clear how the virus will affect them.  I saw an interview of Warren Buffett a few days ago where they asked him how the coronavirus is affecting his businesses. Overall negative, but he did say there were also some positives. He tracks auto accidents every day from Geico and said there has been a noticeable decrease in auto accidents lately.

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Participant ○○○

Re: CET / Plymouth Rock fair value

Presumably less people driving means less claims incurrence...but I would note that PR basically gets reported as some variant of book value.  Insurers now have to mark their public holdings, and flow the gains/losses through the i/s, which also means that the stated book value will absorb the market vol for insurers with big equity holdings of their surplus capital.  PR definitely has some of that risk, but probably not as much as the MKL, Y, BRK/A etc. of the world.

I've always liked PR and read Jim Stone's book.  He's a reasonable person it seems, and I've long assumed that at some it would be sold to Progressive or someone like that when they need a new CEO.  He's at the age where succession plans needs to considered, and it would also be a natural time for owners/BoD to consider strategic possibilities/combinations

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Participant ○○○

Re: CET / Plymouth Rock fair value

Link

In valuing the Plymouth Rock Level 3 investment as of December 31, 2019, management considered Plymouth Rock’s financial condition and results of operations, the insurance industry outlook, and any transactions in Plymouth Rock’s shares. Management used significant unobservable inputs to develop a range of values for the investment. It used a comparable company approach that utilized the following valuation multiples from selected publicly traded companies: price-to-book value (range: 0.81.9; average: 1.4); price-to-historical earnings (range: 13.534.2; average: 24.3); and price-to-forward earnings estimates (range: 11.027.1; average: 18.2). Management also used a discounted cash flow model based on a forecasted return on equity of approximately 10% and a cost of capital of approximately 9%. Plymouth Rock’s book value and an independent valuation of Plymouth Rock’s shares obtained by Plymouth Rock were also considered. Averages of these values were then discounted for lack of marketability and control of the Plymouth Rock shares by 30% and 40%, a range management believes market participants would apply. Management presented and discussed the above information with the Corporation’s directors, who approved the value for the investment.

Significant increases (decreases) in the price-to-book value multiple, price-to-historical earnings multiple, price-to-forward earnings estimate multiple, return on equity rate and book value in isolation would result in a higher (lower) range of fair values. Significant increases (decreases) in the discount for lack of marketability or cost of capital in isolation would result in a lower (higher) range of fair values.

I think the changes listed in the second paragraph - e.g. lower P/B multiples - might result in a decrease in fair value from last quarter. Book value / earnings don't necessarily have to decrease for fair value to decrease.

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Participant ○○○

Re: CET / Plymouth Rock fair value

And insurers are suffering much lower P/B today than they were six months ago.

I've always thought PR might be willing to suppress its valuation for its control holders estate tax considerations.

we don't have a ton of data points to cross reference CET/PR valuations vs. transaction prices.  I think there were two maybe in the last decade.

it's a gem of a company though and as i quip - it grows like Markel but is valued like Allegheny, nice for the reinvesting shareholder.

 

 

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