Although the market as a whole has dropped lower today after declines on Wall Street overnight, the Challenger Ltd (ASX: CGF) share price has fallen more than most this morning.
At the time of writing the annuities company's shares have crashed 15% lower to a 52-week low of $7.86.
Why is the Challenger share price sinking lower?
This morning Challenger released an earnings and guidance update ahead of its half year results on February 12.
According to the release, the company expects to report a normalised net profit before tax of $270 million and a normalised net profit after tax of $200 million for the first half of FY 2019. This will be a 1.8% and 3.8% decline, respectively, on the prior corresponding period.
Management advised that its first half earnings have been impacted by increased market volatility during the half. This includes lower cash distributions on Life's absolute return portfolio, which was $13 million lower than the prior corresponding period.
In addition to this, the company experienced a $4 million decline in Funds Management performance fees compared to the same period last year.
On a statutory basis its result looks much worse as it includes valuation movements on assets and liabilities supporting the Life business, which results in investment experience.
Challenger expects to report a first half investment experience of negative $194 million (after tax), resulting in a statutory net profit after tax of just $6 million.
What about the full year?
Due to its underperformance in the first half and changes to Life's investment portfolio to lower capital intensity, management has had to cut its full year guidance.
It now expects to post a full year normalised net profit before tax of $545 million to $565 million in FY 2019. This compares to FY 2018's normalised net profit before tax of $547 million and means a range of -0.5% to +3.2% year on year growth.
Previous guidance had been for growth of between 8% and 12% on FY 2018's result.
Should you invest?
Today's decline has left Challenger's shares trading at around 14x trailing earnings now.
While I'm not a big fan of the company, at this level I feel it could be worth considering an investment. Though I would still choose Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) ahead of it.
