Why This Analyst Can't Justify Lifting His Rating On Arch Capital At This Valuation

Barclays analyst Jay Gelb believes
Arch Capital Group Ltd.ACGL
is the best managed insurance company with solid track record of growth in book value per share. That alone did not merit the shares to be upgraded or target price increased. He believes the stock price has already factored all the favorable news from the expected acquisition of United Guaranty.

Only recently, the brokerage downgraded the shares from Overweight to an Equal-Weight rating. Now, the firm reiterated its rating and the price tag of $85 on the company's shares. Still, there is an upside potential of about 6 percent.

Related Link: Goldman Sachs Upgrades Arch Capital, Lifts Price Target To $79

"The market now appears to be valuing Arch as a top-tier P&C insurer (ignoring the valuation of MIs) while still giving it all the credit for EPS accretion. We view this as difficult to justify. For example, to rate ACGL OW our price target would need to be nearly $100; this would imply 55 percent EPS accretion in 2017 a 15x P/E multiple," Gelb viewed in a research note to clients.

Barclays sees Arch Capital ceding market share to other mortgage insurers despite an attractive deal with UGC. The firm pointed out pure-play mortgage insurers enjoyed a valuation of about 8x. The brokerage sees half of Arch Capital's pro forma earnings coming from Mortgage and the rest from P&C re/insurance.

Analyst pointed out that Arch Capital is valued about 14x P/E based on EPS accretion in 2017 indicating 35 percent thus limiting any scope for lifting the rating or pricing.

Shares closed Tuesday's regular trading session up 1.01 percent at $80.26.

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Posted In: BarclaysJay GelbAnalyst ColorNewsPrice TargetReiterationAnalyst RatingsMovers