Axa Is An Attractive Buy For A High-Inflation Environment (OTCMKTS:AXAHY)

Thesis on Investment

Axa, a French multinational insurance company (OTCQX AXAHY), is a good investment in times of high inflation. These are the company characteristics that explain why:

• The company has a strong reputation.Brand image is important and it could help the company pass on inflation costs to consumers.
• Axa is profitable and has a strong balance sheet. This will enable it to deal with higher inflation rates.
• The company doesn’t need to make large capital investment each year to keep its business running. This allows them to be less affected when they have to pay higher interest rates and costs.
• Axa can earn a higher return on invested capital because they invest a portion of their insurance premiums in bonds.
• Axa’s global diversification allows the company to offset declines in profits from certain regions with higher profits in other areas.
• My valuation model shows that Axa has a upside of 11.5% and is currently undervalued.
• Axa is a buy for me because the company is undervalued, has a solid balance-sheet, a strong brand image, and offers a wide range of products.

Axa’s Business Model

Axa is a multinational French insurance company. The company distinguishes between the following product types: Property & Casualty; Life & Savings; Health, Asset Management, and Banking. Axa’s revenue in 2021 was 99.931 billion. This is 3.3% higher than in 2020, when Axa generated a revenue of 96.723 trillion.

The company has seen significant growth over the past five years. TransformationFrom a Life company to being primarily Property & Casualty based. Axa is a cash-generative and fee based business that focuses on today’s core business lines.

The sector of Property & Casualty generates the most revenue (49.37%). Life & Savings (33.32%), Health (15.23%) follow. A smaller percentage of Axas total revenue comes from the areas of Asset Management (1.52%), and Banking (0.54%). The revenue from Asset Management grew by 201% in percentage terms in 2021 compared to 2020 (20.1%).

Axas Gross Revenue per Product Category:

The strong business model and superior market position that Axas has within the insurance sector is evident by the 2021 growth in all Axas product groups compared to 2020. These characteristics will help the company to perform well in times of high inflation because they can avoid major problems related to rising costs.

Axa’s level competition with its competitors is dependent on where they are located. Axa competes against banks, insurance companies, asset management companies and investment advisors, as well as other financial institutions. Axa faces intense competition from companies from different industries. This is evident by the fact that they compete against each other.

Important Characteristics of a Company to Perform Well in a High Inflation Environment

In times of high inflation, it is possible to make a good investment if the company can increase its profits despite higher expenses. Inflation should not be a factor in profits. My view is that the company must have different characteristics to be able to function in high inflation environments and become an attractive proposition for investors.

Strong brand image can increase pricing power

A company with a strong brand image will be more likely to be able pass on higher inflation costs to its customers. A strong brand image will create more loyal customers and be more open to price increases. To ensure that the company doesn’t lose market share due to higher prices, it is crucial that customers are willing and able to pay these higher prices.

Warren Buffett also cited this as one of the most important corporate characteristics during times of high inflation. This is a Note to shareholdersIn 1981, he wrote that he believed it important to invest in companies capable of raising prices without losing market share.

Axa was ranked at number 88 on the ForbesList of the top ten most valuable brands worldwide in 2020 The French insurance company is one spot ahead its rival Allianz, which stands at position 89. Forbes ranks Axa at 12 globally in the category of financial services.

Axa’s strong brand image allows it to maintain a stronger pricing position than its competitors who have a weaker brand. This allows Axa the ability to push through higher prices than some of its competitors. This makes Axa a compelling investment in an inflation-prone environment.

High Profitability to Deal with Higher Costs

Profitable companies are better equipped than others to handle increased costs. First, they are less likely face financial difficulties as a result of rising costs. These companies can delay price increases caused by rising costs. This allows them to offer lower-priced products than the competition, and thus gain more customers and market share.

Axa has a margin of 7.97% in EBIT, which allows it to adjust to rising costs. Axa received an A- in Seeking Alpha’s profitability factor grade. This result shows Axa’s high level profitability in comparison with its competitors.

Axa had a Property & Casualty Combined Rate of 1.2 in 2021 94.6%. This Combined RatioAnother indicator of the high profitability of the French multinational insurer is the ratio. This ratio shows how the company performs in its daily operations. Axa’s combined ratio of less than 100 percent indicates that they are making underwriting profits. It also shows that the company is receiving less money from its premiums than it is paying out. This is a testament to the strength and stability of their business model. It further reinforces my belief in Axa’s ability to thrive in an inflation-prone environment.

Increased Interest Rates and Rising Costs are less likely to affect low capital investment.

Companies that do not require large capital expenditures are less likely to be affected by rising interest rates or increased costs. Capital investmentThis is the acquisition by a company of physical assets in order to realize its long-term goals.

Higher inflation rates generally make investments more expensive. Companies that need to make large capital investment may find their costs rise even more. This is what Warren Buffet, CEO Berkshire Hathaway, stated in 2015 during a conference on the characteristics of an outstanding company in high inflation. Shareholder meeting. Buffett said that the best businesses are those that you can buy once, and then you don’t have to make capital investments.

Axa makes a large profit every year. They require relatively low capital investments to keep their business running, compared to other companies. Companies that make material goods, like a car manufacturer or a truck manufacturer, typically require a large capital investment and are less appealing to investors in an environment of high inflation.

Solid Balance Sheet to Adapt to Higher Interest Rates

A company with a strong financial position is more likely than not to be able handle inflation-related higher interest rates. For example, a company that is constantly dependent upon borrowing capital would be more likely be adversely affected by higher interest rates that could result from inflation.

Axa has a Standard & Poors AA credit rating with a steady outlook. Moodys has a AA3 credit ratings with a stable perspective and a rating of AA from Fitch with a positive outlook. All of these ratings highlight Axa’s solid balance sheet. This, along with Axa’s steady earnings year-over-year, suggests that I don’t expect rising interest rates to pose a major problem for the company.

Their ability to balance Axa’s financial portfolio is another sign of its strength. Solvency II Ratio: 217%. The company has increased its dividend to 1.54 shares per share in 2021. In addition, it has completed a share purchase of 1.7 million in 2021. Axa’s dividend increased 7.7% compared to 2020. This is due to Axa’s long-term strategy for steadily increasing earnings per shares. It is another indicator that Axa has a strong business model.

The Growth in Interest Rates Should Not Have a Negative Impact on the Business Model

The company’s business model needs to be strong and stable, and it shouldn’t be affected negatively by interest rates that could rise due to inflation.

Axa, an insurance company, can also benefit from higher inflation. The inflation-related rise in interest rates over the long term means that bonds have higher interest rates. A company like Axa can earn more on their invested capital if they invest a portion of their insurance premiums in bonds. However, interest rates can rise and the return they get can be higher.

Axa’s assets managed (AUM) increased 29 billion in 2021 compared to 2020, to reach a total of 887billion. Gross revenue in Asset Management increased 20% to 1.523 Billion. This was mainly due a higher management, distribution and performance fee, which were triggered by favorable market conditions. According to the company. Axas rising assets under management, (AUM), further supports the idea that the company is a great investment in times of high inflation.

Global Diversification to Recommend Profits Drops in Certain Countries With Increasing Profits In Other Countries

A company that is globally diverse is more likely than a company that is primarily focused on one country to be able compensate for a decrease in profits due to higher costs in some countries.

Axa’s business is divided into the following regions: France, Europe and Asia, AXA XL International and Transversal & Central Holdings.

Axas Gross Income by Geographic Regions

Axa’s global diversification means that the company is able to offset revenue declines by increasing revenue elsewhere. Axa’s revenue growth in nearly all regions in 2021 was evidence of this fact. France saw 13.1% growth in revenue, with the company increasing its revenue from 25.064 Billion in 2020 to 28.349 Billion in 2021. Axa, due to its success in global diversification, will be an attractive hedge for inflation from an investor’s perspective.

Valuation

To determine Axa’s intrinsic value, I used the EPS Multiplier method to calculate its valuation. The fair value of the company is calculated using this method. This results in an upside rate of 11.5% for the current share prices.

The Seeking Alpha EPS FWD Long Term Growth (3-5YCAGR) Rate for Axa is 7. Therefore, I assume a 7% EPS growth rate for the company over the next ten years. This is also in line avec Axa management expectationsThey expect to achieve EPS growth at the higher end in the 3-7% CAGR target range over the next few years.

Next, I assume a 3% annual growth rate over the next 10 year. To calculate a fair price, I used Axas current discounted rate (WACC), of 4.65%.

My calculations are based upon the following information, as shown below:

Source: The Author

Based on these assumptions, I came up with the following results:

Source: The Author

Relative Valuation Models

Axas Ratio P/E (TTM).

Axa’s P/E Ratio is currently 7.98, while their average P/E ratio over the last five years is 14.52. This comparison shows that Axa’s current P/E Ratio is 45.02% lower compared to its average over the last five years. This indicator suggests that the company’s current value is low.

It is clear that Axas’ current P/E Ratio of 7.98 is lower than the sector average of 10.02. The sector average is 20.27% lower than the current P/E Ratio.

Below is the chart that shows Axa’s P/E ratio for the last five years. It once again highlights the fact that the company’s current value is too low.

Axa compared to its competitors

Source: Seeking Alpha, The Wall Street Journal

Axa’s strong position within the insurance industry is demonstrated by a comparison to other insurance companies. Axa has the highest revenue (139 billion), highest dividend yield (6.18%), and highest dividend growth rates (13.4%%), in comparison to Allianz (OTCPK.ALIZY), Zurich Insurance Group(OTCQX.ZURVY), Assicurazioni Generali [OTCPK.ARZGF], MetLife (NYSE.MET) and American International Group. These indicators support my belief that Axa is a good investment during high inflation.

Risques

Axa is subject to a lot of competitive pressure. This is what I consider one of the main risks when investing in them. Axa operates within a highly competitive environment. They compete with other insurance companies and reinsurance firms as well with asset management firms and private equity firms.

Furthermore, disruptive competitive challengesIt is important to consider the possibility of new competitors, such as financial technology and insurance companies. These competitors may be able to benefit from less stringent regulatory requirements and technological innovation.

This could also be due to increased competition from continued consolidation in both the reinsurance and insurance sectors. This could result in increased pricing pressures and decreased profitability.

Axas’ future business results could be affected by natural disasters such as those caused by diseases or climatic conditions.

Axa’s existence over 200 years, and the fact that the company’s management has shown that it is capable of reacting to changing market conditions with success, reinforces my belief that Axa is going to be able compete against its competitors in future.

I view the currency as a risk for investors from the United States. U.S. investors are at risk from a possible depreciation in the euro against the US dollar. This could be due to a decline in Europe’s GDP in the coming years.

The Bottom Line

I used the EPS Multiplier Method to calculate the intrinsic value for Axa. It calculated a fair value for the company at $29.18. At the current share prices, this gives rise to 11.5%. According to this calculation, Axa’s stock can be considered undervalued at the moment. Additional Relative Value Models show that Axa stock is undervalued.

Axa is a buy when you consider the current stock price, the strong brand image that strengthens company pricing power, its solid balance sheet, high profitability, global diversification and its high profitability. Axa is an excellent stock for high inflation. Because of its strong business model and high profitability, the company should have the ability to withstand higher inflation rates.

Axa has a high dividend yield at 6.18%. It also has a low P/E Ratio at 7.98. This ratio is 45.02% less than the average P/E Ratio in the last five year and 20.27% less than the sector medium. These characteristics make Axa stock attractive to dividend-income investors. Axa is a long-term investment for me. I will keep my stock in Axa during high inflation as well. I intend to receive dividends from the company, while keeping a long holding period.