IAG shares 'highest quality' in the sector: fundie

Is Australia's largest general insurance company also the highest quality?

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Key points

  • The IAG share price has outperformed the benchmark index so far this year
  • Shares in the insurance company currently trade at a slight premium
  • WAM Leaders believe the company is the highest quality in its sector

The Insurance Australia Group Ltd (ASX: IAG) share price has outperformed the broader market this year, but could current prices still represent an opportunity?

In the latest financial year, IAG swung back into profit with $347 million of earnings. This achievement coincides with a 2.2% gain in IAG shares year-to-date. Meanwhile, an investment in the S&P/ASX 200 Index (ASX: XJO) over the same period has yielded a 9.8% loss.

Some market commentators have shown interest in the insurance industry for its potential inflation hedging quality. What also needs to be considered is the exposure risk to more natural disasters. So, is there still value in the IAG share price?

What do the fundamentals say?

In the current macroeconomic environment, investors have become much more selective with where they invest their money. The byproduct is a market that is more value-driven, reigniting the focus on fundamental investing.

Now that IAG is making a profit again, the price-to-earnings (P/E) ratio can provide some insight into whether the general insurance giant is undervalued still. Currently, the company is valued at approximately 32 times its earnings. However, the Australian insurance industry trades on an average P/E ratio of 30 times.

Importantly, while the company looks to be trading at a slight premium to the market at the moment, analysts are forecasting considerable earnings growth ahead. As it stands, estimates indicate IAG could generate $831 million in profits for FY23.

If the company were to achieve such a result and maintain an industry average P/E, IAG shares would increase roughly 120%.

At the same time, IAG's balance sheet appears to be in reasonable condition. At the end of FY22, the company had a debt-to-equity ratio of 31.6%. Furthermore, IAG held $938 million worth of cash and cash equivalents, lowering its total net debt.

However, there remains a significant risk to future earnings in the form of greater-than-expected catastrophe claims. The Bureau of Meteorology has declared the third year in a row of La Niña for spring and summer in Australia. This could mean more damaging floods along the north and east coasts of the country.

One fundie keen on IAG shares

At a recent Wilson Asset Management (WAM) Leaders webinar, the fund manager revealed its interest in accumulating high-quality ASX shares. WAM equity analyst Anna Milne described why the team believes IAG ticks the boxes, stating:

IAG is the owner of the brand NRMA, which is one of Australia's most trusted brands. The psychology of investing in these [IAG and others] quality names is that when share prices decline, it's seen as an opportunity to get these high-quality names on sale.

While discussing several ASX shares, including IAG, Milne described them as being "the highest-quality names in their respective sectors". Additionally, Milne highlighted the insurance company's expansion nationally as a main positive driver.

The IAG share price currently sits at $4.56 per share.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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