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A stock picker’s guide to AMP Limited in 2014

It was an unenjoyable year for shareholders in insurer and wealth manager AMP Limited (ASX: AMP) in 2013, with the stock significantly underperforming the wider market. AMP’s share price fell 9.5% for calendar year 2013, in contrast the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) increased 14.6%.

The major cause of this share price underperformance was AMP’s earnings downgrade after experience losses within its Wealth Protection business. The company update forced investors to adjust their forecasts lower. Currently, based on a consensus of analyst estimates, AMP is forecast to report earnings per share of 28.4 cents per share (cps) for 2013 which suggests earnings will be down 15.7% on the previous year.

Investors don’t have much longer to wait to find out whether this forecast is on the mark. AMP is scheduled to report its results for the financial year (FY) ending 31 December (the company reports in a calendar year basis) on 20 February.

How is 2014 shaping up?

While Wealth Protection is a large profit generator for the group – in FY 2012 it contributed around 22% before allocation of group office costs – it still leaves approximately 78% of earnings being generated from other divisions.

You can consider the outlook for the Wealth Management and AMP Capital divisions. Just like other fund managers such as IOOF Holdings Limited (ASX: IFL) and SFG Australia FPO (ASX: SFW), AMP enjoys significant leverage to rising equity markets which positions it well for the coming year. In FY 2012 these two divisions contributed 51% to earnings.

The AMP Capital division started 2013 with $125 billion in assets under management (AUM), however by the end of the third quarter this had risen to $135.9 billion; this should mean the division will be cycling a higher average level of AUM in 2014.

Likewise Wealth Management reported an increase in AUM (excluding self-managed super funds) from $86 billion to $96.7 billion over the three quarters, which should help drive earnings growth in the division, although tempered by the implementation of MySuper regulations.

Foolish takeaway

As a top 20 company, AMP is a widely owned and widely followed blue chip stock. Earnings per share are forecast (consensus estimate) to bounce back in 2014 to 34.6 cps which would be higher than those recorded in 2012 – this suggests analysts see the problems confronting the Wealth Protection business as manageable.

If AMP can achieve 34.6 cps in earnings, then the stock is trading on a one-year forward price-to-earnings ratio of 12.2 times which appears quite appealing.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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