With Aviva (LSE: AV) trading on a price-to-earnings (P/E) ratio of 9.4, it appears to be capable of making gains of more than 20% just from an upward rerating. Added to this is a strategy that appears to be sound and the potential for synergies from the combination with Friends Life. As such, now could be a great time to buy Aviva for the long term.
Clearly, there’s still some way to go before Aviva is the finished article. As with any acquisition, it can take time to deliver on expectations. But with Aviva due to become a dominant life insurance player, its long-term profitability looks set to rise. In fact, with the company forecast to increase its earnings by 10% next year, it appears to have a clear catalyst through which investor sentiment could improve. Therefore, while the company’s share price has drifted lower in the first few months of 2016, the rest of the year could be much more profitable for the company and its investors.
Priced to buy
Similarly, Prudential (LSE: PRU) remains a top notch buy within the financial services space. Like Aviva, it has the scope to rise by over 20% simply from an upward rerating. The company’s shares currently trade on a P/E ratio of 10.9, meaning a 20% rise in its share price would result in a still very appealing rating of 13.1. Given the company’s long-term potential to grow sales and profitability across Asia, this seems to be a very fair price to pay.
Certainly, Prudential is set to disappoint in the current year, with the company’s bottom line expected to fall by around 4%. Although this has the potential to hurt investor sentiment in the short run, it could also provide an excellent opportunity for long-term investors to buy-in at a more attractive price level. And with Prudential yielding 3.3%, it remains a relatively enticing income play too.
Meanwhile, RBS (LSE: RBS) also has the potential to rise by over 20% owing to a low valuation. Its P/E ratio of 11.4 seems to be low at first glance, but when the bank’s forecast growth rate for next year is factored-in, it appears to be even more so. That’s because RBS is expected to deliver a rise in net profit of 24% in the 2017 financial year, which when combined with its rating equates to a price-to-earnings-growth (PEG) ratio of only 0.4.
As such, RBS looks set to reverse its share price fall of 40% in the last year, although with the outlook for the global economy still being rather uncertain it could do so in a relatively volatile fashion. Still, with dividends due to rapidly rise next year, RBS could be yielding as much as 3% in 2017. This sharp rise in shareholder payouts could act as a positive catalyst on the company’s share price, as well as provide an income boost for the company’s investors.
