A “20% Off” Sale On A Global Blue Chip

Munich-based Allianz Insurance (AZ) is Europe’s largest insurer by premium income. Like other insurance giants, Allianz ran into trouble in the early part of the decade when it was hit by high claims and the 2000-to-2002 bear market. Allianz was also hurt by a botched 2001 acquisition of investment bank Dresdner Bank. The insurer has been in investors’ doghouse ever since.

But here’s why I think Allianz could be in for a solid bounce over the next few weeks, as investors reassess the prospects of this global giant.

First, Allianz recently reported more than €10 billion ($13.18 billion) in full-year operating profit, on record revenues of €101 billion. That got analysts in attendance so excited that they rapped their tables in applause. More importantly, the analysts boosted their profit projections through 2009. Even normally squeamish J.P. Morgan Chase raised Allianz to a "buy."

Second, Allianz is a classic European restructuring story. And successfully wringing inefficiencies out of bloated European behemoths is one of my favorite — and profitable — investment themes. Since arriving in 2002 to clean house, Allianz’s CEO Michael Diekmann has trimmed layers in company management and diversified the distribution channels of the company’s traditional insurance business.

Diekmann has also developed a business strategy to diversify the revenue base of Allianz away from its traditional reliance on property and casualty insurance by increasing its share of profits from higher-margin units like asset management and banking. Diekmann’s goal over the next five years is to get property and casualty down to below 50% of operating income.

Third, despite Allianz’s strong results, the stock remains unloved by investors. But that is about to change. With its shares valued at only 9.77 times analysts’ estimated per-share earnings for 2007, Allianz is trading at a full 20% discount to global insurers. That makes Allianz the cheapest stock among its European peers.

Diekmann has also adopted an "underpromise, overdeliver" style to managing expectations concerning Allianz — a very smart move, in my view. With analysts uniformly agreeing that the earnings guidance given by Diekmann is conservative, there may be some upside surprises in store for investors. And it’s precisely these types of surprises that get stocks back into investors’ good graces. Just a narrowing of the discount would give Allianz a significant upside from its current levels.

So buy Allianz (AZ) today at market and place your initial stop at $18.30. That means for every $100 you risk on this trade, you would buy 40 shares — paying approximately $832, based on Friday’s closing price of $20.80.

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