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The Challenger Ltd share price just rose another 7%

The Challenger Ltd (ASX: CGF) share price has risen by another 6.8% today. Only last Friday the share price was sitting at $10.80 and now it’s $12.20, meaning it has gone up by almost 13% in just one week.

Challenger’s presentation to the Macquarie Group Ltd (ASX: MQG) was the main cause of the strong rise over the past two days.

The key theme of the presentation was how much long-term potential that Challenger has. It has a dominant market-leading share of annuities, which provides retirement income for retirees.

It has two segments to its business, Life and Funds Management.

The Life segment is doing well because there’s a growing number of retirees entering retirement. Australia has an ageing population, the number of people over the age of 65 is expected to grow by 75%. As more people enter retirement, more retirees will end up investing in an annuity.

The annuity money is then managed by market-beating fund managers within Challenger’s system. Challenger said that it’s a highly differentiated business model and it would be extremely hard to replicate and it gives the business a considerable resilience and competitive advantage in a high growth market.

Challenger could be one of the main beneficiaries from the superannuation system. It has grown by 8% CAGR over the last decade and the total pool is expected to double over the next 10 years.

Management are focusing Challenger’s efforts towards the superannuation area, indeed management said about super: “This is the very definition of a growth market.”

Foolish takeaway

Even after the impressive rise over the past week, Challenger shares are only trading at 16x FY19’s estimated earnings. I think this is a very reasonable price to pay for a business that still has good long-term potential. However, in a market downturn there’s a good chance Challenger will be hurt more than most because it has a large balance sheet of assets that are particularly related to interest rate moves – that’s when I’ll be looking to buy more shares.

An even better idea for growth could be this exciting share that is a market leader in the auto industry.

Breaking news: ASX companies set to raise dividends!

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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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