Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at Aviva (LSE: AV) (NYSE: AV.US) to ascertain if it can make £3bn in profit.
Have we been here before?
A great place to start assessing whether or not Aviva can make £3bn in profit is to look at the company’s historic performance. And it would appear that Aviva made a profit of £3bn back during 2006, just before the financial crisis set in, thanks to a strong performance from the company’s portfolio of investments.
However, since 2006 Aviva has struggled to remain profitable as the company has been buffeted by a number of headwinds, including the economic situation within Europe. What’s more, it would appear that Aviva has become a victim of its own success as a number of the company’s acquisitions have come back to haunt it. Indeed, during 2012 Aviva revealed that the company had expanded too fast during the past decade and there were indications that the company had become undercapitalised and overstretched.
As a result, the company reported a loss including exceptional items of £3.1bn for 2012 and management unveiled a sweeping restructuring plan.
But what about the future?
2012 was a year of change for Aviva, beginning with management’s identification of 43 business units that were underperforming; out of a total of 58. Subsequently, management decided to close any operations that were not considered central to future growth.
So far, it would appear that this turn-around plan is bearing fruit. For example, within Aviva’s full-year results the company reported that it is on track to deliver £400m of cost savings by 2014. In addition, Aviva revealed that it had sold the underperforming, Aviva USA division for £1.6bn — more than originally expected.
Further, Aviva reported growth of both, operating profit and the value of new business written during the year, showing that the company still has the ability to attract customers and drive growth.
Nevertheless, Aviva continues to struggle within Europe and the company lacks any significant exposure to growth regions such as Asia, unlike larger peer Prudential. That being said, Aviva’s savings products remain attractive in the low interest rate environment and an ageing population should benefit Aviva’s business in the long-term.
Foolish summary
All in all, Aviva is making progress slimming itself down, cutting costs and returning to growth, which should led to sustainable long-term growth. The company also stands to benefit from the rising demand for savings products over the long-term.
So overall, I feel that Aviva can make £3bn profit.