Over the past six months, American Financial Group’s shares (currently trading at $131.65) have posted a disappointing 10.6% loss while the S&P 500 was down 2.1%. This might have investors contemplating their next move.
Is now the time to buy American Financial Group, or should you be careful about including it in 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?
Despite the more favorable entry price, we're cautious about American Financial Group. Here are three reasons we avoid AFG and a 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 3.9% annualized rate over the last two years, worse than the broader insurance industry and in line with its total revenue.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
American Financial Group’s EPS grew at a weak 4% compounded annual growth rate over the last five years, lower than its 7.9% 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
In the insurance industry, book value per share (BVPS) provides a clear picture of shareholder value, as it represents the total equity backing a company’s insurance operations and growth initiatives.
Disappointingly for investors, American Financial Group’s BVPS grew at a sluggish 6.5% 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. Following the recent decline, the stock trades at 2.1× forward P/B (or $131.65 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward the most dominant software business in the world.
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