It’s been a fantastic turnaround in recent years for Aviva (LSE: AV) (NYSE: AV.US), with its current management team successfully changing the operations of the business so as to deliver much-improved bottom line performance. In fact, shares in the company have risen by 14% in the last year alone and, looking ahead, a further 20% rise seems to be a very realistic target. Here’s why Aviva could make those gains and reach 660p per share.
Growth Potential
Although Aviva’s bottom line is forecast to increase by a rather lowly 4% this year, the insurer is expected to deliver much stronger gains in 2016. In fact, Aviva’s earnings are due to grow by 15% next year, which is a considerably higher rate of growth than the FTSE 100, and shows that Aviva’s current strategy of disposing of riskier and lower reward divisions is proving to be a successful one. And, with there being a considerable amount of rationalisation yet to come, Aviva could continue to surprise on the upside when it comes to its bottom line prospects for the medium to long term.
Valuation
Despite having the potential to grow profit at a much faster rate than the wider index, Aviva is still priced at a sizeable discount. For example, it has a price to earnings (P/E) ratio of just 11.1, while the FTSE 100’s P/E is much higher at around 16. As such, Aviva could see its share price trade at 660p through there being an upward rerating to its valuation that still leaves it trading at a discount to the wider sector.
For example, a P/E ratio of 13.5 would be sufficient for Aviva’s shares to trade at 660p, and yet this would still leave them at a sizeable discount to the FTSE 100’s P/E ratio. As such, a price target of 660p seems to be very achievable for Aviva over the medium term.
Looking Ahead
While Aviva’s share price will not move higher all on its own, there seems to be sufficient news flow in the pipeline to change investor sentiment sufficiently to push its rating higher. Notably, there is the merger with Friends Life that could cause investors to rethink their views on how Aviva can continue to generate upbeat earnings growth (i.e. through cost savings rather than purely through revenue growth), while the company’s rationalisation plans have yet to be fully completed, which may also mean further improvements in profitability moving forward.
Therefore, while the reaching of 660p would represent impressive performance over the medium term, Aviva is a stock with huge long term potential. As such, it seems to be well worth buying at the present time, with very appealing gains being on offer as the company continues to go from strength to strength.
