Even After Gaining 87% Aviva plc Has Further To Run

Since hitting a low of 255p during 2012 Aviva’s (LSE: AV) (NYSE: AV.US) shares have rebounded rapidly — the shares now sit a staggering 87% above the 2012 low.

Some investors might be put off the company after gains like these, but it would appear that Aviva still has further to run.

Trading at a discountAviva

Even a quick glance at Aviva’s valuation will tell you that the company is undervalued, despite recent gains. Indeed, the company currently trades at a forward P/E of only 10.8, compared to the life insurance sector average of 15.6. What’s more, the City expects Aviva’s earnings per share to jump 11% next year, which puts the company on a 2015 P/E of just 9.7. 

Aviva is expected to report earnings per share of 51.9p next year. So, if the company’s valuation were to move in line of the life insurance sector average, the company’s shares would be trading at 809p, 62% above current levels. 

That’s not all. Aviva currently trades at a forward earnings multiple below that of its own historic average. Specifically, over the past five years Aviva has traded at an average P/E of 13.4, once again implying significant upside from current levels. 

Business is good 

Aside from Aviva’s lowly valuation, the company is also making strong progress recovering from past mistakes and profits continue to grow.

For example, during the first half of this year, Aviva’s profits increased by 4% compared to the same period a year ago. 4% growth may not seem like a lot, but this figure is impressive when you consider that, due to the change in UK pension rules, the value of new business written in the UK fell 21%. 

Moreover, the company continues to make progress cutting costs and reducing debt. Operating expenses during the first half fell by £129m, to £1.4bn. The group net asset value, as measured according to International Financial Reporting Standards, rose 7%, to 290p. 

Overall, during the first half of this year Aviva reported a 9% increase in the value of new business written. Markets in Poland, Turkey and Asia grew the fastest, with new business within these regions rising 54%. Further, Aviva continues to seek cost savings and additional avenues for growth. Additionally, the company continues to evaluate its businesses, selling those which are performing below par. 

And of course, over the long term, Aviva is set to benefit from an ageing population increasingly responsible for its own pension income. Aviva’s leading position in the retirement savings market should ensure that its business continues to grow.  

Aviva may not be everyone’s cup of tea, but the company’s position in the retirement savings market makes it a solid long-term investment.  

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool 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.