Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish if there is still time for investors to buy in.
Today I’m looking at Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US) to ascertain if its share price has the potential to push higher.
Current market sentiment
The best place to start assessing whether or not L&G’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company.
Unfortunately at present, it would appear that many investors and indeed, the wider market, are still unsure as to what effect the recent government pension changes will have on the world famous pension provider.
Indeed, L&G has depended upon lucrative annuity sales to bolster the company’s bottom line for decades. However, now the government has removed the requirement to buy an annuity on retirement, L&G’s sales and profitability are both likely to take a hit.
Upcoming catalysts
Unfortunately, we will not know how much of an effect the government’s pension changes will have on L&G, until the company reports its next set of full-year results, which are not due until March of next year.
However, one City of London analyst has forecast a 30% decline in bulk annuity new business profits for L&G over the next year or so.
Still, L&G’s management team remains proactive and is currently searching for acquisitions to boost the company’s growth. In particular, the company seeking to buy an annuity business in the United States, having already acquired US investment firm, Global Index Advisors.
What’s more, Legal remains a leading provider of pensions and annuities, a fact reinforced by the company’s recent deal with Prudential to insure £3.6bn worth of defined-benefit pension liabilities of ICI, the now defunct UK chemicals group.
Having said all of that, the catalyst that is most likely to have an effect of L&G’s performance however, is the general mood in the wider market. Specifically, L&G has a substantial asset management business, which has been booming recently as financial markets around the world grind higher.
Unfortunately, if financial markets go into reverse, L&G’s assets management business is likely to suffer as a result.
Valuation
Surprisingly, despite recent concerns about the government’s pension changes, L&G’s shares are trading at a record valuation. For example, L&G is currently trading at a forward P/E of 13, which may not seem expensive but it is significantly above L&G’s 10-year average P/E of 9.
Further, during the run-up to the financial crisis, during the boom year of 2006 and 2007, L&G’s shares were only trading at a forward P/E of 11.5. All in all, this makes L&G’s shares look expensive at current levels.
Foolish summary
So overall, I feel that L&G is overvalued.
