Is the price of prudential financial stocks fair?

Prudential Financial (NYSE: PRU) stock has gained about 11% year-to-date compared to the S&P500 index’s 3% decline over the same period. Moreover, at its current price of $121 per share, it is trading just above its fair value of $120 – Trefis’ estimate for Prudential Financial valuation. The insurance giant recently released its fourth quarter results, beating consensus estimates for profit and revenue. It reported total revenue of $16.4 billion, 2% higher than in the fourth quarter of 2020. This was due to an increase in net realized investment gains (losses) of -$1.7 billion at $878 million. However, the impact was partially offset by a 12% year-over-year decline in total premiums and a 36% decline in asset management fees and other income. Premiums were primarily hurt by an 18% drop in US corporate premiums, driven by a 36% decline in the US pensions sub-segment. Overall, adjusted net income increased 47% year-on-year to $1.19 billion, resulting in quarterly EPS of $3.13. The improvement in profitability figures is due to a decrease in total profit and expenses as a % of revenue from 94% to 92%.

The company’s total revenue grew 24% year-on-year to $70.9 billion in 2021. It was driven by 25% growth in the U.S. insurance segment, followed by an 8% increase in the investment management division. The insurance segment in the United States mainly benefited from a significant increase in income from the retirement sub-segment. On the other hand, international insurance business grew only 2% year-on-year. Overall, revenue growth, coupled with a decrease in total benefits and expenses from 101% to 87%, resulted in adjusted net income of $7.6 billion, compared to -395 million dollars in 2020.

Prudential Financial is highly dependent on net investment income for its profitability. Notably, the company derives nearly 30% of its revenue from NII. We anticipate that the NII will likely benefit from an increase in interest rates in fiscal 2022. In addition, the recovery of the economy will likely drive the premium total. Globally, Prudential financial income are expected to remain around $64 billion in fiscal 2022. In addition, PRU adjusted net margin is expected to decline slightly from 2021 levels. This will likely result in adjusted net income of 5.4 billion and an annual EPS of $14.64. This, coupled with a P/E multiple just above 8x, will lead to a valuation of $120.

Here you will find our previous coverage of Prudential Financial stocks, where you can follow our view over time.

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