Is the Challenger Ltd share price a buy after its 20% fall?

A fall of more than 20% is generally considered a substantial fall, whether it’s a whole share market or an individual business.

Challenger Ltd (ASX: CGF) has fallen by more than 20% since its all-time high in December 2017. Challenger is Australia’s leading annuity provider, meaning it has a dominant market share of current annuities and an even bigger share of new annuities.

The biggest reason why the Challenger share price has dropped so much is that interest rates have continued to increase in the US. Rising interest rates affects all asset prices like gravity, so most shares can expect to trade at a slightly lower multiple of their earnings compared to a few years ago.

Challenger is particularly affected because it has a huge amount of fixed-interest investments on its balance sheet. The value of these fixed-interest assets will theoretically decline if US rates rise to 2% and beyond in the coming months and years.

People often think of a falling share price as a bad thing, but I don’t think Challenger’s fall should be seen negatively. Over the past five years the share price has grown from $3.93 to today’s $11.34, which is a great return. I think the share price went a bit too high at the end of last year, today is a much more reasonable price.

Challenger is exposed to two strong tailwinds. The first tailwind is that the number of people aged over 65 is expected to grow by 75% over the next 20 years. More people in retirement should mean the number of annuities will increase.

The other tailwind is the growth of superannuation. Everyone’s superannuation is growing due to the mandatory contributions, growing asset values and the (for now) better tax treatment of money inside super compared to outside super. Bigger superannuation balances mean that the size of the annuities should increase.

The combined growth of bigger annuities and more annuities should boost Challenger over the coming years.

Indeed, in Challenger’s recent half-year report to 31 December 2017 it revealed that assets under management increased by 18%, Life sales were up 21% and ‘normalised’ net profit after tax (NPAT) increased by 6%.

Foolish takeaway

I think Challenger is one of the best shares in the ASX100. I wouldn’t want to sell my shares today, I’m much closer to buying more. It’s currently trading at 15x FY19’s estimated earnings, which I think is good value. If the price drifts below $11 then I’ll be very tempted to buy more shares.

Until then, another top growth idea is this hot stock which I already own in my portfolio.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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