Calculated Acquisitions And Digital Growth Propel US Expansion And Revenue Potential

Key Takeaways

• Strategic acquisitions and partnerships drive revenue growth and operational efficiencies in U.S. and Canadian segments, bolstering base earnings.
  
• Strong European market fundamentals, particularly in the U.K. and Ireland, support revenue and net margin growth through successful bulk annuity and performance strategies.
  
• Challenges such as demographic trends, interest rate effects, and limited risk exposure could constrain revenue growth and earnings potential across key segments.

Catalysts

Engages in the life and health insurance, retirement and investment services, asset management, and reinsurance businesses in Canada, the United States, and Europe.

• Strong base earnings growth in the U.S. segment has been fueled by strategic acquisitions and enhanced offerings, such as the acquisition of Plan Management Corporation, which could drive increased revenue over time.
  
• The Wealth & Retirement business is poised for further growth through strategic partnerships, like the agreement with Primerica Life Insurance in Canada and expanding seg fund access, which can drive increased revenue.
  
• Robust capital levels support flexibility for future growth opportunities while maintaining regulatory capital stability, positively impacting net margins and earnings.
  
• Empower's enhancements in digital platforms and investment in automation contribute to gaining market share and operational efficiencies, which could improve net margins and revenue from increased assets under administration.
  
• Growth in Europe, driven by market success in bulk annuities in the U.K. and solid market performance in Ireland, indicates strong underlying fundamentals that can positively affect revenue and net margins.

Great-West Lifeco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Great-West Lifeco's revenue will grow by 30.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.9% today to 5.7% in 3 years time.
• Analysts expect earnings to reach CA$4.2 billion (and earnings per share of CA$4.73) by about November 2027, up from CA$3.6 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CA$4.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2027 earnings, down from 12.6x today. This future PE is lower than the current PE for the CA Insurance industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 1.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.75%, as per the Simply Wall St company report.

Great-West Lifeco Future Earnings Per Share Growth

Risks

• Empower, a key growth driver in the U.S., faces industry-wide net outflows due to demographic trends, as retirees withdraw savings. This could put pressure on revenue and asset levels if participant inflows don't offset these outflows.
  
• Recent reductions in P&C risk exposure at their reinsurance segment, while protective, could limit upside potential from improving risk-adjusted pricing conditions, potentially dampening revenue and margins.
  
• The lower spread income at Empower due to higher crediting rates in a high interest rate environment could affect the earnings growth momentum previously driven by fee and investment income.
  
• Persistently high interest rates have diminished demand for equity release products in the UK, potentially reducing revenue and growth opportunities within certain segments that are otherwise performing well.
  
• European CSM (contractual service margin) increases primarily rely on annuity business growth, which may be susceptible to interest rate changes and longevity assumptions, potentially impacting future earnings stability and growth trajectory.

Valuation

• The analysts have a consensus price target of CA$49.5 for Great-West Lifeco based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$55.0, and the most bearish reporting a price target of just CA$41.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$74.1 billion, earnings will come to CA$4.2 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of CA$49.09, the analyst's price target of CA$49.5 is 0.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.