Today I am looking at life insurance leviathan Aviva‘s (LSE: AV) (NYSE: AV.US) earnings prospects for 2014.
Turnaround plan ready to deliver earnings surge
Despite a backdrop of increasing competitiveness in the insurance space, Aviva is witnessing levels of new business surge as economic conditions continue to improve, a fantastic omen for the new year.
In the UK, from which Aviva derives more than half of all business, the value of fresh inflows rose 5% to £302m during the first nine months of 2013. Meanwhile, activity in its second largest market of France leapt 33% during the period to £112m.
Promisingly, the company is also targeting emerging markets across the globe to deliver future growth, and saw new business value in Asia, Poland and Turkey rise 43%, 48% and 40% respectively during January-September. These ‘growth markets’ now account for 22% of all business, up from 18% in the corresponding 2012 period.
Furthermore, Aviva’s restructuring drive also continues to pull up trees and deliver improved shareholder value. The firm has embarked on a heavy divestment programme in recent years to rid itself of non-core divisions and create a more svelte earnings-generating machine, and most notably shed itself of its Aviva USA arm for £1.6bn during the autumn.
The firm’s transformation programme is also delivering hefty cost savings elsewhere, and operating expenses slumped 10% during January-September from the 2011 baseline to £2.23bn. Aviva has warned that it “remains in the early stages of turnaround,” but given the success that the firm has enjoyed in cutting costs and rebuilding the balance sheet, I believe that investors can look forward to further upside from its turnaround strategy next year and beyond.
It is true that Aviva attempts to arrest the disastrous effects of the 2008/2009 banking crisis have taken a long time to realise, and the insurer followed three consecutive years of annual earnings drops by recording losses per share of 15.2p in 2012. Still, analysts expect the firm’s transformation programme to generate earnings of 43.8p per share this year, and for 2014 growth of 9% is anticipated to 47.8p.
Such projections leave Aviva changing hands on a P/E rating of 9.3 next year, well within bargain territory below 10 times projected earnings and beating a forward average of 14.5 for the complete life insurance sector. And the firm’s price to earnings to growth (PEG) multiple for next year is bang on the value watermark of 1. I believe that investors looking for exciting growth prospects at decent prices can do a lot worse than plant their cash into Aviva.