According to Value Line Investment Survey, “Markel Corp. markets and underwrites specialty insurance products and programs to a variety of niche markets.” When reviewing the Value Line tear sheet on Markel, there are a couple of items that make the stock very compelling.
First, Value Line indicates that the company has a fair value of 1.5 times the book value. Using the most conservative full year data from 2011 provided by Value Line, Markel has a fair value of $528.15 which is a 20% premium above the current market price of $439.77. Value Line estimates that by 2017, Markel would have a book value of $447. This implies a fair value of $670.50. Assuming that Markel only achieves half of the projected growth in the book value, the fair value would be at $599. Considering that Markel typically trades above fair value, the prospects are reasonably favorable.
Next, Markel has increased their book value from $49.16 in 1996 to $352.10 in 2011. With Markel having the ability to consistently increase their book value at double digit rates is phenomenal in our view. As an added benefit, Markel has only increased the number of shares outstanding from 5.46 million to 9.62 million in the period from 1996 to 2011. This suggests that the growth of the company has not come at the expense of the shareholders.
We have constructed an Altimeter for Markel (MKL) that is based on a hypothetical dividend assuming an average payout from earnings of 13% and a compounded annual growth rate (CAGR) of the dividend at 9.9%.
Although hypothetical, our assumptions of a dividend policy is the most conservative possible. We believe that, if compelled, Markel could easily maintain such a dividend policy while increasing the book value. Whenever, the Altimeter is above 180, the stock should be sold and whenever it is below 107, MKL should be bought. Below is the performance of the stock price when it falls within the parameters previously noted.
| Date | Price | Altimeter | buy/sell | % change |
| 2/23/1996 | 87 | 106 | buy | 106.61% |
| 6/8/1998 | 179.75 | 182 | sell | -31.99% |
| 3/6/2000 | 122.25 | 103 | buy | 157.67% |
| 10/5/2004 | 315 | 181 | sell | -22.14% |
| 11/20/2008 | 245.25 | 97 | buy | ???????? |
An alternative strategy, for investors with a long-term perspective, could be to accumulate the shares of Markel at or below 107 on the Altimeter (currently $395.90) without consideration of selling. We feel this would be a prudent stance since the declines experienced by the stock at the “sell” indications are not meaningful enough to warrant actually selling the stock by the time the next “buy” indication is given.
Finally, our concern for the worst case scenario is always in the back of our mind. For this reason, we assume that the lows of 2009 will be revisited and ask ourselves are we able to handle such a situation. If based on the Altimeter low of 2009, Markel could decline as low as $281.20. Our hope is that such a low is not visited again. However, with the aid of Dow Theory, we are prepared to accumulate additional shares when, and if, such an opportunity arises.