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Why Challenger Ltd shares have bounced back today

The Challenger Ltd (ASX: CGF) share price was among the worst performers on Thursday, but on Friday it has been a very different story so far.

In early trade the annuities company’s shares are up a solid 3% to $11.12.

Why are Challenger’s shares bouncing back today?

Challenger’s shares were sold off on Thursday after its quarterly update disappointed the market.

The company’s latest assets under management (AUM) update for the March quarter revealed AUM growth of 3% quarter-on-quarter to $78.5 billion.

While this was positive, investors appeared to react negatively to its total life sales of $1.1 billion, down 13% on the prior corresponding period.

One leading broker that wasn’t put off by the decline in total life sales was Macquarie Group Ltd (ASX: MQG).

Equity analysts at the investment bank have upgraded Challenger’s shares from neutral to an outperform rating following the release of this latest update.

The broker has also lifted its price target on the company’s shares slightly to $13.00, representing potential upside of almost 17% for its shares over the next 12 months.

According to the note, Macquarie’s analysts felt its AUM growth was strong given the weak quarters that other fund managers have reported this month.

Which is a great point. Weak quarters from competing fund managers have led to shares such as Perpetual Limited (ASX: PPT), Magellan Financial Group Ltd (ASX: MFG), and AMP Limited (ASX: AMP) all falling to 52-week lows this month.

Should you invest?

Based on Macquarie’s forecasts for earnings per share of 68.2 cents in FY 2018 and 74.5 cents in FY 2019, Challenger’s shares are changing hands at 16x FY 2018 earnings and 15x FY 2019 earnings.

I think this means Challenger’s shares are attractively priced, just as long as it delivers on Macquarie’s expectations.

Though it is worth noting that not all brokers are positive on Challenger. Shaw and Partners has a sell rating and $9.00 price target on the company’s shares, which I think is something to consider before investing.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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