Prudential Financial Stock is trading above fair value


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[Updated 12/04/2020] Prudential financial update

Having gained more than 100% since the March low and at its current price of just under $ 79 per share, Prudential financial actions (NYSE: PRU) is 10% above its fair value of $ 72 – Trefis estimate for Prudential Financial valuation. In its recently released third quarter results, PRU beat consensus earnings estimates, while revenues underperformed. It reported total revenue of $ 15.42 billion, 2% more than in the third quarter of 2019. This could be attributed to a 5% growth in international insurance business coupled with an increase of 12% of the Workforce Solutions division in the United States. Notably, net realized investment gains (losses) decreased from $ 853 million in the third quarter of 2019 to – $ 79 million in the last quarter.

We expect the company to report $ 60.9 billion in revenue for 2020, about 6% lower than a year ago. Our forecast is based on our belief that the economy should experience some improvement in the last quarter, which will benefit total premiums and net investment income. Net income for the year is expected to be reduced by 12% due to higher operating expenses, reducing revenue per share to $ 9.11 for fiscal 2020. After, Prudential financial income are expected to reach $ 62.7 billion in fiscal 2021, primarily driven by growth in international insurance business. Additionally, net income is expected to see some improvement, leading to EPS of $ 10.12 for fiscal 2021. This, coupled with a P / E multiple of just above 7x, will lead to a valuation of $ 72. .

[Updated 9/01/2020] Prudential Financial Stock has limited upside potential

Prudential financial actions (NYSE: PRU) lost nearly 59%, from $ 95 in late 2019 to around $ 39 in late March, then soared 73% to around $ 68 now. But that means it’s still 28% less than at the start of the year!

There were 2 clear reasons for this: The Covid-19 epidemic and the economic downturn have brought down market expectations for 2020 and consumer demand in the short term. This is likely to have an impact on insurance premiums and net investment income, which are the two main sources of income for Prudential Financial. However, the Fed’s multibillion-dollar stimulus measures in late March helped stop negative market sentiment, which is also evident from the rally in stocks after this point.

But, we believe that Prudential Financial stock has already reached its growth potential and has limited the upside.

Trefis estimates Prudential Financial valuation at around $ 71 per share – slightly above the current market price – based on an upcoming trigger explained below and a risk factor.

The trigger is an improved trajectory for Prudential Financial revenue in the second half of the year. We expect the company to report 2020 revenue of $ 60.4 billion, about 7% lower than the 2019 figure. Our forecast stems from our belief that the economic scenario should show some. improvement in the third trimester. Recently released US consumer spending data, which shows month-on-month growth of 8.5% in May, followed by 5.6% mom in June give more weight to our expectations. If the trend continues in the coming months, it should improve both net premiums figure and insurance premium investment income. The latter is very critical to the profitability of an insurance company and has improved due to the recent improvement in the securities market. This, in turn, would benefit the earnings trajectory over the next several months. Net profit for the year is expected to fall to $ 3.6 billion, down 14% year-on-year, reducing EPS to $ 9.14 for fiscal 2020.

After that, Prudential Financial’s revenue is expected to improve to $ 62.1 billion in fiscal 2021, primarily driven by growth in retirement solutions in the United States and international insurance segments. This is expected to push EPS’s figure to $ 10.09 for fiscal 2021, up 10% year-on-year.

Finally, how much should the market pay per dollar of Prudential Financial profits? Well, to make almost $ 10.09 a year from a bank, you would have to deposit around $ 1110 into a savings account today, which is around 110 times your desired earnings. At the current Prudential Financial stock price of around $ 68, we’re talking about a P / E multiple of around 7x, which we think is appropriate.

Having said that, insurance is a risky business right now. Growth looks less promising and the short-term outlook is less than rosy. What is behind this?

Prudential Financial is a global insurance company with approximately $ 768 billion in identifiable assets between its U.S. and international insurance segments (according to fiscal 2019 data). The company derives approximately 22% of its total income from income generated by investing in insurance premiums. Therefore, its business model is very sensitive to variations in investment returns. While the broader markets have been on a growth path (up 55%) since the March trough, any further deterioration in the economic situation or an unanticipated jump in the number of Covid-19 cases may turn the tide and could have a negative impact on PRU turnover.

The same trend is visible through Prudential Financial peer – American international group. Its income is also expected to be reduced in fiscal 2020 due to lower premiums and lower investment income. Additionally, American International Group stock is currently trading at a price of around $ 30, but is expected to reach EPS of around $ 3.53 for fiscal 2021.

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