American Financial Group has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 11.5% to $145.67 per share while the index has gained 11.2%.
Is there a buying opportunity in American Financial Group, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think American Financial Group Will Underperform?
We’re cautious about American Financial Group. Here are three reasons you should be careful with AFG, plus one stock we’d rather own.
1. Net Premiums Earned Point to Soft Demand
Insurers sell policies then use reinsurance (insurance for insurance companies) to protect themselves from large losses. Net premiums earned are therefore what's collected from selling policies less what’s paid to reinsurers as a risk mitigation tool.
American Financial Group’s net premiums earned has grown at a 3% annualized rate over the last two years, much worse than the broader insurance industry and in line with its total revenue.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
American Financial Group’s EPS grew at a weak 2.4% compounded annual growth rate over the last five years, lower than its 7.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. Substandard BVPS Growth Indicates Limited Asset Expansion
For insurers, book value per share (BVPS) is a vital measure of financial health, representing the total assets available to shareholders after accounting for all liabilities, including policyholder reserves and claims obligations.
To the detriment of investors, American Financial Group’s BVPS grew at a sluggish 5.5% annual clip over the last two years.
Final Judgment
We see the value of companies helping consumers, but in the case of American Financial Group, we’re out. That said, the stock currently trades at 2.4× forward P/B (or $145.67 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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