How Direct Line Insurance Measures Up As a GARP Investment

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 Direct Line Insurance Group  (LSE: DLG  ) to see how it measures up.

What are Direct Line Insurance Group's earnings expected to do?

  2013 2014
EPS Growth -14% 24%
P/E Ratio 11.4 9.2
PEG Ratio n/a 0.4

Source: Digital Look.

Direct Line was spun off from Royal Bank of Scotland and listed on the London Stock Exchange in October of last year. In its full maiden year as a separate entity in 2013, the firm is expected to punch a double-digit earnings fall before recovering robustly in the following 12-month period.

The predicted loss for the current year results in an invalid PEG rating, although this is forecast to register some way below the value watermark of 1 in 2014. Also, Direct Line's price-to-earnings (P/E) ratio is anticipated to fall below 10 next year, territory that represents decent value for money.

Does Direct Line Insurance Group provide decent value against its rivals?

  FTSE 250 Non-Life
Insurance
Prospective P/E Ratio 17.4 10.5
Prospective PEG Ratio 6.2 1.8

Source: Digital Look.

For the current year, Direct Line's forecast earnings dip leaves it lagging against both the FTSE 250 and non-life insurance peers when considering the PEG value. Additionally, its fellow insurers outstrip the company in terms of forward P/E rating.

At first glance, Direct Line would not appear to be an appealing GARP investment because of meagre earnings expectations for the near term. But for investors seeking juicy growth for the long haul, I believe the U.K.'s largest home and motor insurer has both the scale and know-how to navigate an increasingly cutthroat industry and push earnings higher.

The hot line to improved earnings
The onset of rising competition across the domestic insurance-space is making trading more difficult for the company, particularly when it comes to car insurance. Indeed, Direct Line saw gross written premiums across its operations drop 4.5% during the first three months of 2013 to just over £1 billion.

However, the company's breadth of activity gives it fantastic flexibility and, unlike many of its sector peers, it is not over-reliant on one core area to deliver earnings growth. Direct Line is a huge player in the British home and car insurance spheres, and is also improving its footprint in other areas, including travel and pet insurance.

At the same time, the insurance giant is also boosting activity in foreign markets and, more specifically, is making decent progress in Germany and Italy. I believe that Direct Line is an attractive turnaround bet as it boosts the scope of its operations, and cost-stripping initiatives should keep earnings heading in the right direction.

In addition, Direct Line is an appetizing pick for those seeking lucrative investment income. Indeed, juicy dividend yield projections of 5.9% and 6.6% for this year and next enhance the investment case, in my opinion.

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