Using the Earnings Power Value framework with a WACC of 7.9% and normalized earnings of $5.7B, Arch Capital Group Ltd. has a fair value of $188.96 per share. The EPV range is $158.02 – $234.43 based on WACC sensitivity (6.4% – 9.4%).
| Low | Selected | High | |
|---|---|---|---|
| Normalized Earnings | 5,741 | 5,741 | 5,741 |
| (/) WACC | 9.4% | 7.9% | 6.4% |
| Enterprise Value | 61,168 | 72,804 | 89,906 |
| (-) Net debt | 1,736 | 1,736 | 1,736 |
| Equity Value | 59,432 | 71,068 | 88,170 |
| (/) Outstanding shares | 376 | 376 | 376 |
| Fair Price | $158.02 | $188.96 | $234.43 |
Earnings Power Value (EPV) estimates what a company is worth based on its current normalized earnings, assuming zero growth. It values the business as a perpetuity: Normalized Earnings / WACC. This gives a conservative floor value — the company's worth if it never grows but maintains its current profitability.
The model normalizes earnings by: (1) using sustainable gross margins (5-year average) applied to current revenue, (2) deducting maintenance-level operating expenses (average R&D + SG&A as % of revenue), (3) applying the average effective tax rate, and (4) subtracting the average excess of CapEx over D&A (net reinvestment needed to maintain current capacity).
EPV is most useful as a comparison anchor: if the market price is below EPV, the stock may be undervalued even without any growth. If market price exceeds EPV, the premium reflects growth expectations — which may or may not materialize.