Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.
Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.
A long time coming
Avivas recovery from the 2008/9 financial crisis has been a long time coming. While fellow top three insurers Prudential and Legal & General have been growing earnings strongly in the last couple of years, Aviva has lagged well behind.
However, the pallindromic insurer has been showing increasingly strong signs of recovery since the arrival of Mark Wilson as chief executive at the start of last year. The man who previously transformed Hong-Kong-based AIA Group into the leading pan-Asian insurance company is now working his magic at Aviva.
In half-year results earlier this month, Wilson told us that momentum in Avivas turnaround continues. All of our key metrics have improved. He added that Aviva remains a work in progress, and these results are a step in the right direction.
What that means is that theres still plenty of scope for driving up earnings strongly in the coming years.
The PEG ratio (P/E divided by earnings-per-share (EPS) growth) is a useful measure for judging whether we are buying growth at a reasonable price. The lower the PEG ratio the better.
The table below shows forecast P/E and PEG ratios for the current year and 2015 for the Footsies top three insurers.
|Market cap (bn)||Share price||Forecast P/E 2014||Forecast PEG 2014||Forecast P/E 2015||Forecast PEG 2015|
|Legal & General||14.2||241p||14.3x||1.4||13.1x||1.4|
While Avivas 2015 PEG is still attractive relative to its rivals, is it attractive in absolute terms? In other words, could Aviva be simply the least expensive of three very expensive stocks?As you can see, Aviva looks cheap relative to its rivals on both P/E and PEG. The companys ultra-low PEG of 0.1 for the current year is a result of a big EPS leap after the major overhauls of 2013. Next years PEGs are more meaningful.
Well, the beauty of the PEG is that it does measure absolute value. P/Es may be different from industry to industry and move up and down over time but the PEG scale always remains the same.
A PEG of 1 represents fair value. A PEG of above 1 implies an overvalued stock and a PEG of below 1 implies an undervalued stock.
So, in absolute terms, Prudential and Legal & General are on the expensive side, while Aviva is bang on fair value.
At a PEG of 0.9 (share price 465p) Aviva would move into undervalued territory, but for a real bargain Id be looking for a PEG of no more than 0.8. That means Id be after a share price of 413p.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.