LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the Growth At A Reasonable Price, or GARP, strategy.
This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.
Today I am looking at RSA Insurance (RSA) to see how it measures up.
What are RSA's earnings expected to do?
| 2013 | 2014 | |
|---|---|---|
| EPS Growth | 27% | 5% |
| P/E Ratio | 9.6 | 9.2 |
| PEG Ratio | 0.4 | 1.9 |
Source: Digital Look.
RSA is expected to recover from last year's 20% earnings per share (EPS) decline in the coming years, although growth in 2014 is expected to decelerate sharply from that of the current year.
The explosive EPS increase forecast for 2013 drives the corresponding PEG ratio into bargain territory, although slower growth next year pushes it back above the benchmark of 1. Still, a price-to-earnings (P/E) ratio below 10 for both of these years underlines its current position as a value stock -- any reading under 10 is considered excellent value.
Does RSA provide decent value against its rivals?
| FTSE 100 | Non-life Insurance | |
|---|---|---|
| Prospective P/E Ratio | 14.9 | 10.5 |
| Prospective PEG Ratio | 4.5 | 1.8 |
Source: Digital Look.
RSA trounces the FTSE 100 in terms of both forward PEG and P/E ratings. The firm also beats its non-life insurance rivals when considering these measures, although both metrics are much closer versus its sector counterparts.
In my opinion, RSA qualifies as a classic GARP stock owing to its ultra-attractive PEG rating, with a pleasing P/E rating amplifying its value investment case.
Foreign markets primed to drive earnings skywards
RSA announced in May's interims that net written premiums rose 5% during its first quarter to £2.3 billion. The company also reported a slight uptick in premiums within its key markets of the U.K. and Western Europe, to £952 million, although activity in Scandinavia remained static at £694 million.
However, exceptional growth in other markets looks set to drive earnings expansion in the coming years. Indeed, net written premiums in developing markets increased 16% in January, February and March, to £325 million, while in Canada the number rose 18% to £359 million.
And the company is complementing strong organic growth with bubbly M&A activity in these markets -- in fact, acquisitions in Canada and Argentina in recent years have helped to push growth in these regions.
Appetite for RSA's shares moderated recently after management announced plans to rebase the dividend in order to drive future growth. The firm is still on course to deliver chunky shareholder payouts, however -- a yield of 5.9% is forecast for this year and next.
So for those seeking appetising growth prospects as well as decent dividend income, I believe that RSA is a stock worthy of serious consideration.
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