Warren Buffett is well known for his love of bank stocks, but one of his biggest holdings in the financial industry is a company investors may not be so familiar with. In this Motley fool live Video clip, registered on August 30, Fool.com contributors Matt Frankel, CFP and Jason Hall discuss what the company is, what it does and why it plays such an important role in Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) equity portfolio.

Matt Frankel: You’ll talk about this one first – and I want to jump in on that as well – is in a bad mood‘s (NYSE: MCO), MCO.

Jason Hall: Yes. What I wanted to do with Moody’s is just because I think it’s so interesting. We talked about S&P Global recently, and there are basically three companies that are pretty much the same as rating companies for pretty much anything public, be it corporate debt, corporate credit ratings, etc. ‘business, all of these things that they do that put them in a position of just immense power that does that.

I will show this table. Seventy-four percent gross margins, and if you notice here you can see that the margins are actually trending up. Although you chart five years, you see the margins increase. Operating margins, upward trend. Cash flow, I really wanted to show that, we were talking about a huge cash cow business.

The first graph I showed is the global financial crisis. It’s the real estate bubble, the debt bubble, all that, and it drove the company’s operating margins, cash margins for a while. But again, the idea here, we thought these companies were going to have big problems and the federal government was going to regulate all of that, and the business model was potentially a major threat. But as we have seen, cash flow and margins have continued to flow in very well.

Where I think Moody’s is really well positioned right now, that’s for sure, it’s still very important for ratings, it’s still their core business, but it’s an analytical business now.

Frankel: Yes. I mean, the core business by far is the scoring business, I think that’s what really attracted Buffett. They don’t own the business, but there are three main players. There are S&P [Global] (NYSE: SPGI), there’s Moody’s, and there’s Fitch Ratings. I bet you can’t tell me who # 4 is. I do not know who it is.

Room: It is not worth knowing.

Frankel: No, you don’t need to know. But then they have their analytical tools. It’s a very similar business to S&P Global, if you saw our show a few weeks ago where we talked about it. They are one of the best players in a market that has only a few players. I think that’s really what attracted Buffett here. It is a company in the financial sector. He reduced a lot of his holdings in the financial sector. I don’t really see his Moody’s stake going anywhere. They currently own just over 13% of the business, and I think it’s going to stay that way.

Room: I think it’s going to increase because, again, this is the ideal Buffett company in so many ways. He’s been paying a dividend, he’s been increasing that dividend every year, for a dozen years now. Because of its scale and size, they’re going to start buying back stocks over time, so you’re going to see so many of those other Buffett stocks. While Buffett may never buy another stock, his position will grow as the company repurchases and reduces the count of those shares. These are the things that make him very Buffett.

I think it’s too easy to take on. There are three of these companies, they each have their own market share, and that doesn’t really change significantly from year to year. It seems like it’s not just “Why own it?” But at the end of the day, the company will see medium to low single-digit revenue growth. But because of its business model, the extra margins and extra cash margins from that revenue is the reason you saw on the chart that its margins and operating results continue to grow at an inordinate rate. It can increase profits and cash flow at a double digit rate every year just because those new sales are worth more money.

At the height of economic uncertainty and market volatility over the past year, the Bank of England’s Prudential Regulation Authority (PRA) has banned banks from paying dividends to ensure sufficient capital is detained to deal with potential losses.

In July, the PRA announced the immediate removal of these restrictions on dividend payments for the year 2020 for the sector. This was a slightly different tactic from that of the European Central Bank, which chose to maintain the restrictions until next month.

The latest Janus Henderson Dividend Index shows UK banks wasted no time in embracing their new found freedom, contributing significantly to second quarter payments, which jumped 61% year-on-year.

HSBC was one of the biggest contributors, with Barclays, Lloyds and NatWest also reinstating dividends.

Dividend, obvious?

It is undoubtedly good news that the banks are starting to pay dividends again, as it shows confidence in the Bank of England’s economic recovery. It also demonstrates the strength of banks’ balance sheets compared to the aftermath of the global financial crisis. This should bode well for corporate and personal financing in the coming years.

But we believe there are other ways to play on the relative strength of financials. Apart from Barclays, which we believe to be underestimated given its proven ability as an investment bank and its more international focus, we do not own any UK bank.

While we don’t shy away from financials as a sector, we tend to look for companies that have a more diverse asset base and higher pricing power than the big banks.

Below are five financial companies that we own.

Close brothers

The fund recently celebrated its 21st anniversary and Close Brothers has been part of the portfolio since day one. We love it because it’s an old-fashioned merchant bank with a slightly different DNA. The basic banking part is not private financing for small regional businesses: supporting the cogs of the UK economy.

Historically, the company has been run very conservatively. We like this because it has been proven over several cycles that, rather than just increasing the loan portfolio, it will only do so when the pricing is right and the returns offered are decent relative to the risk it is. take. Finally, he owns the broker Winterflood, which has been brilliantly successful in volatile markets over the past 18 months.

London Stock Exchange Group

We love companies involved in the asset management industry. We’ve owned Schroders, for example, for almost two decades, and we were in the top 10 more or less throughout that time.

In addition to the asset managers themselves, there are those who provide ancillary services such as LSEG. We added it to our portfolio last year after it sold out due to Brexit and acquisition concerns.

Its entry barriers are very high, since it holds around 99% of the market share in some of its stock exchange and clearing house activities. It is not just a matter of the stock market, and the market seems to forget this periodically.

The recent acquisition of Refinitiv further diversifies LSEG and so far the integration is on schedule and under budget. We believe stocks are positioned to revalue as integration risk declines in the coming quarters.

Hargreaves Lansdown and IntegraFin

Another service area of ​​the asset management industry is platform companies that are both low in capital and cashless.

Hargreaves Lansdown is probably the best known in the retail investor space and has benefited greatly from increased interest in self-directed investing.

HL enjoyed record inflows in 2020 and is well positioned to capitalize on this success, by encouraging these new users to use the HL platform for their long-term savings and retirement.

Meanwhile, IntegraFin, owner of Transact, is used by more than 6,000 financial advisers who manage more than £ 41 billion in client funds.

It is a purely commercial platform, providing top notch customer service to its UK advisor clients. Customer loyalty is high and revenues excellent.

Barclays

We have owned Barclays for some time now on the basis that it is unique among the big banks because of its activities in the capital markets.

This proved to be beneficial last year by providing countercyclical ballast as the consumption side of the business was under threat.

Barclays’ price-to-book (P / B) ratio relative to similar US banks is another reason we think it is attractive. It is currently around 0.54x P / B compared to JP Morgan’s 1.83x P / B.

They are not entirely comparable companies, but this is a significant difference in our opinion. We strengthened our position in Barclays in March and June of last year when financials were no longer popular and subsequently benefited from the recovery in value. We pruned at the end of last year.

Bet on it?

If interest rates rise, all banks will have upside potential. For this reason, it’s good to have a bank or two in your portfolio if you think inflation might outlast the current “transitional” effect discussed by central banks.

Bond market yields peaked at the start of the year and are falling despite rising short-term inflation.

The US 10yr is around 135bp, the UK 10yr gilt at 61bp and the 10yr German Bund is decidedly negative. With central banks still the dominant buyer in fixed rate markets, there are few real price discoveries and countless economists have been baffled that bond yields no longer follow traditional inflation measures.

Compared to the index, we are underweight banks, but we have a lot of other financial stocks, which leads us to have the same overall level in financial stocks as the index.

Typically, we seek to invest in companies with unique characteristics that set them apart from their competition. In comparison, the big banks are under intense price pressure, as there is little that differentiates them from one another.

Old Citywire Wealth Manager Top 30 Under 30 Star Fred Mahon heads the SVS Church House UK Equity Growth fund alongside Rory Campbell-Lamerton and James Mahon, rated AA by Citywire. Over three years, the fund achieved a return of 19%, compared to an average return of 11.7% for its peers.

Prudential Financial (NYSE: PRU) is expected to release its results for the second quarter of fiscal 2021 on Tuesday, August 3 (after market close). We expect Prudential Financial to exceed consensus estimates for both revenue and earnings. The insurance giant topped profit estimates in the last quarter, mainly due to lower benefits and spending as a percentage of revenue, leading to a significant increase in its net profit from – $ 270 million to 2.8 billion dollars in the quarter. In addition, the company saw growth in business income, investment management and net investment income in the United States. We expect the same trend to be driving the results for the second quarter of fiscal 2021 as well.

Our forecast indicates that Prudential Financial valuation is around $ 109 per share, or 8% above the current market price of around $ 100. Check out our interactive dashboard analysis at Prudential Financial pre-earnings: what to expect in the second quarter? for more details.

(1) Revenue expected ahead of consensus estimates in Q2

Trefis estimates that Prudential Financial’s revenue in the second quarter of 2021 will be around $ 13.95 billion, up 2% from the consensus estimate of $ 13.71 billion. The company reported revenue of $ 57 billion in 2020, down 12% year-on-year, mainly due to lower premiums. On the flip side, its investment management revenue grew 16% year-over-year thanks to an increase in assets under management (AuM) – the segment contributes nearly 7% of revenue. Additionally, despite the decline in investment returns, the company’s net investment income was almost on par with 2019, as the negative impact of lower returns was offset by growth in investable assets. While premiums were still down in the first quarter of 2021, its net investment income saw some recovery. In addition, the investment management segment continued its growth momentum during the quarter. We expect the same trend to govern the second quarter results.

Going forward, we expect some improvement in premiums and policy costs in fiscal 2021, thanks to a recovery in economic conditions. In addition, the investment management segment is expected to experience continued growth driven by inflows from AuM. That said, investment returns are expected to remain below pre-Covid-19 levels for some time to come. However, an increase in assets to invest will likely offset the effect. Overall, Prudential Financial’s revenue is expected to remain around $ 62.5 billion in fiscal 2021. Our dashboard on Prudential Financial revenue offers more details on the business segments.

2) EPS likely to exceed consensus estimates

Prudential Financial’s adjusted second-quarter 2021 earnings per share is expected to be $ 3.08 per Trefis analysis, nearly 2% above the consensus estimate of $ 3.02. The company’s profitability figures saw a sharp decline in 2020, driven by benefits and higher expenses as a% of revenue. This reduced the EPS figure from $ 10.23 to $ -1.00 during the year. However, adjusted net income fell from $ -270 million to $ 2.8 billion in the first quarter due to lower benefits and expenses as a percentage of revenue – from 102.5% a year ago to 80%. We expect the same trend to continue in the second quarter of fiscal 2021 results.

Prudential Financial revenues are expected to grow 10% year-on-year in fiscal 2021. Additionally, net profit margin is expected to recover close to 2019 levels. Overall, this will allow PRU to post a EPS of about $ 10.31 for the current year.

(3) Estimated share price 8% higher than current market price

Through our Prudential Financial valuation, with an EPS estimate of around $ 10.31 and a P / E multiple just below 11x in fiscal 2021, that translates to a price of $ 109, or 8% above the price. current market of about $ 100.

Note: P / E multiples are based on the stock price at the end of the year and reported (or expected) adjusted earnings for the entire year

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Prudential Financial (NYSE: PRU) is expected to release its results for the second quarter of fiscal 2021 on Tuesday, August 3 (after market close). We expect Prudential Financial to exceed consensus estimates for both revenue and earnings. The insurance giant topped profit estimates in the last quarter, mainly due to lower benefits and spending as a percentage of revenue, leading to a significant increase in its net profit from – $ 270 million to 2.8 billion dollars in the quarter. In addition, the company saw growth in business income, investment management and net investment income in the United States. We expect the same trend to be driving the results for the second quarter of fiscal 2021 as well.

Our forecast indicates that Prudential Financial valuation is around $ 109 per share, or 8% above the current market price of around $ 100. Check out our interactive dashboard analysis at Prudential Financial pre-earnings: what to expect in the second quarter? for more details.

(1) Revenue expected ahead of consensus estimates in Q2

Trefis estimates that Prudential Financial’s revenue in the second quarter of 2021 will be around $ 13.95 billion, up 2% from the consensus estimate of $ 13.71 billion. The company reported revenue of $ 57 billion in 2020, down 12% year-over-year, mainly due to lower premiums. On the flip side, its investment management revenue grew 16% year-over-year thanks to an increase in assets under management (AuM) – the segment contributes nearly 7% of revenue. Additionally, despite the decline in investment returns, the company’s net investment income was almost on par with 2019, as the negative impact of lower returns was offset by growth in investable assets. While premiums were still down in the first quarter of 2021, its net investment income saw some recovery. In addition, the investment management segment continued its growth momentum during the quarter. We expect the same trend to govern the second quarter results.

Going forward, we expect some improvement in premiums and policy costs in fiscal 2021, thanks to a recovery in economic conditions. In addition, the investment management segment is expected to experience continued growth driven by inflows from AuM. That said, investment returns are expected to remain below pre-Covid-19 levels for some time to come. However, an increase in assets to invest will likely offset the effect. Overall, Prudential Financial’s revenue is expected to remain around $ 62.5 billion in fiscal 2021. Our dashboard on Prudential Financial revenue offers more details on the business segments.

2) EPS likely to exceed consensus estimates

Prudential Financial’s adjusted earnings per share (EPS) in the second quarter of 2021 is expected to be $ 3.08 per Trefis analysis, nearly 2% above the consensus estimate of $ 3.02. The company’s profitability figures saw a sharp decline in 2020, driven by benefits and higher expenses as a% of revenue. This reduced the EPS figure from $ 10.23 to $ -1.00 during the year. However, adjusted net income fell from $ -270 million to $ 2.8 billion in the first quarter due to lower benefits and expenses as a percentage of revenue – from 102.5% a year ago to 80%. We expect the same trend to continue in the second quarter of fiscal 2021 results.

Prudential Financial revenues are expected to grow 10% year-on-year in fiscal 2021. Additionally, net profit margin is expected to recover close to 2019 levels. Overall, this will allow PRU to post a EPS of about $ 10.31 for the current year.

(3) Estimated share price 8% higher than current market price

Through our Prudential Financial valuation, with an EPS estimate of around $ 10.31 and a P / E multiple just below 11x in fiscal 2021, that translates to a price of $ 109, or 8% above the price. current market of about $ 100.

Note: P / E multiples are based on the stock price at the end of the year and reported (or expected) adjusted earnings for the entire year

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See everything Trefis price estimates and To download Trefis data here

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