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 Aviva (LSE: AV) (NYSE: AV.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 Aviva’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company.
At present, it would appear that the investors are highly excited about Aviva’s prospects, as the company’s shares have recently surged past highs not seen since before the financial crisis.
It would seem as if this positive sentiment is warranted, as City forecasts currently predict that Aviva’s earnings per share will jump higher by 117% during 2014 as the company’s recovery plan takes hold. Still, there are pockets of the business which are still suffering from local economic conditions, such as Italy and Spain.
In addition, the group is on track to deliver its £400m expense reduction target by the end of 2014, which should boost profit margins.
Upcoming catalysts
Despite the fact that Aviva’s turnaround is in full swing, the firm’s performance remains dependent upon the global economic environment.
Luckily, it would appear that both the European and wider global economies are in the process of returning to health and growth, which should be reflected in Aviva’s results.
What’s more, Aviva’s management continue to streamline the business, cutting costs, selling non-performing divisions and branching out into emerging markets to boost earnings. In particular, at the beginning of this year Aviva linked up with Indonesian insurance leviathan, Astra International to create Astra Aviva Life.
That being said, Aviva’s management is still trying to return the business to health and while the company’s recovery is in full swing, the market is likely to want more information on the turnaround before it assigns a higher price to Aviva’s shares.
With this being the case, it is likely that Aviva’s next upcoming catalyst will be the company’s investor day on the 9th of July, followed by Aviva’s full year results at the beginning of August.
Valuation
Even though Aviva’s shares are currently bouncing around five year highs, the company does not look expensive compared to peers. In particular, current City forecasts indicate that the company is trading at a forward P/E of 10.7, significantly below the life insurance sector average P/E of 19.2.
However, looking back over Aviva’s historic valuations it would appear that the company’s shares are actually expensive. Indeed, during the past decade Aviva’s shares have traded at an average forward P/E of 7.5, around 30% below current levels!
Foolish summary
So overall, while Aviva’s turnaround is in full swing and the company looks cheap compared to peers, Aviva’s current valuation compared to its historic average is worrying. With that in mind, I feel that Aviva is overvalued at current levels.
