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.
What are Aviva's earnings expected to do?
Aviva does not boast a valid earnings per share (EPS) growth figure in 2013, although this is a mathematical issue. EPS forecasts of 42.1 pence for this year compare with losses per share of 15.2 pence in 2012. Growth is expected to moderate to 45.7 pence next year, however.
The insurer fails to provide a valid PEG rating for this year owing to this projected earnings swing, although 2014's value falls within the bargain benchmark of 1. As well, the company's price-to-earnings (P/E) ratio registers at below 10 for the next two years -- a value below 1 is considered stunning value for money.
Does Aviva provide decent value against its rivals?
|FTSE 100||Life Insurance|
|Prospective P/E Ratio||14.8||12.8|
|Prospective PEG Ratio||4.5||4.5|
Both the FTSE 100 and life insurance sectors can provide valid forward PEG ratios, albeit comfortably above the value threshold of 1, unlike Aviva. Still, the life insurance company's vastly better P/E rating illustrates its value as a decent value stock.
Aviva's earnings snapback this year, combined with cheap PEG rating in 2014, mark it out as a decent GARP selection on face value, according to City analysts. However, for some investors the company may still represent a risky pick owing to the steps it still has to take as part of its restructuring plan.
Getting better but still a long road ahead
In the last financial year, Aviva slashed the final dividend 44% in a bid to cut leverage and boost retained earnings. It also announced that the interim payout in the current year would suffer a similar markdown. This prompted interest in the insurer to drop as investors weighed the subsequent anticipated earnings improvement against future dividend uncertainty.
The company's May interims gave reason for cheer as new business value rose 18% in January-March to £191 million, helped by a 33% increase in new business from its critical U.K. operations. However, enduring weakness on the continent weighed on the results, with business in Spain falling 67% and Italian business falling 56% from the same 2012 period.
The company still has a long slog ahead in terms of cost reduction, even though operational costs fell 10% in quarter one. Although Aviva is undoubtedly making progress with its turnaround plan, mixed results across its international operations, rising competition at home, and patchy combined ratio results across the group, mean that I would like to see further signs of improvement before selecting the firm as a stable growth stock.
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Royston does not own shares in Aviva. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.