The Challenger Ltd (ASX: CGF) share price has fallen by 11.8% over the past three months, so it's worth considering if it is a buy at today's price.
Challenger is Australia's leading annuity provider. It gives people the ability to turn their capital into a guaranteed source of income.
The business has been a strong performer since the GFC. The share price has grown from the GFC low of $0.99 to today's $12.36.
Here are my bull and bear cases for Challenger:
Bear case
Challenger is dependent on asset prices growing for it to outperform the returns it is offering on its annuities. If it doesn't outperform then it is 'losing' money over the long run. I'm sure asset prices will grow over the long-term, but there could be trouble ahead in the short-term.
A lot of Challenger's balance sheet is related to fixed interest investments and these change in value, just like other assets and can go down.
Volatility and interest rate changes also affect Challenger's equity and property investments.
If people are able to get a higher rate of return from other safe investments, such as US government bonds, then annuities may seem less attractive.
Bull case
Most of the bear reasons above are hopefully short-term reasons to be careful about the Challenger share price.
In the long run there is going to be an increasing number of people reaching retirement age who want a secure place for their money. The number of people over the age of 65 is expected to grow by 75% during the next 20 years.
The pool of superannuation assets is expected to keep growing strongly with the mandatory 9.5% superannuation contribution for employees and the tax-effective investment option for business owners. By 2025 the contribution rate is pencilled in to increase from the current 9.5% rate to 12% rate.
In 2018 there will be around $60 billion shifting from pre to post retirement phase according to the Australian Taxation Office. This figure is expected to grow each year.
Foolish takeaway
Overall, I think Challenger has excellent long-term growth prospects due to the reasons I mentioned above. Perhaps the next year or two will be rocky for Challenger as US interest rates rise, but I believe this will present a good buying opportunity if the price does fall.
