After A 100% Rally, Prudential Financial Stock Is Still Strong

After more than 100% gain since the March 23 lows of the last year, at the current price of $81 per share we believe Prudential Financial Stock (NYSE: PRU) has some more upside potential. Prudential Financial, the insurance giant, has seen its stock rally from $39 to $81 off the recent bottom compared to the S&P which moved around 70% – so the stock is leading the broader markets. That said, there is a mismatch between its stock and revenue growth – Prudential Financial’s top-line has fallen 6% to a consolidated figure of $60.2 billion for the last 4 quarters from the consolidated figure of $64 billion for the 4 quarters before that. However, the company has reported an earnings beat in its third-quarter 2020 results coupled with positive revenue growth. It was driven by the recovery in U.S workforce solutions and international insurance segments, which is the main reason behind positive investor sentiment toward the stock.

Prudential Financial’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the gains since the March 23 lows, we feel that the company’s stock still has potential as its historic P/E multiples imply it has further to go.

The company’s revenues grew around 9% from $59.7 billion in 2017 to about $64.8 billion in 2019, however, the net income figure decreased by 47% over the same period. This could be attributed to the increase in policyholders’ benefits cost from 56.6% of revenues in 2017 to 60.3% in 2019 and the one-time impact of the U.S Tax Act in 2017.

While the company has seen steady growth in revenue over 2017-2019, its P/E multiple has increased. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard “What Factors Drove 30% Change In Prudential Financial Stock Between 2017-End And Now?” has the underlying numbers.

Prudential Financial’s P/E multiple has changed from just above 6x in FY 2017 to around 9x in FY 2019. While the company’s P/E is about 8x now, this leaves some scope for an upside when the current P/E is compared to levels seen in the past years – P/E multiple of around 9x at the end of 2019.

So Where Is The Stock Headed?

The Covid-19 pandemic and the economic slowdown have shifted customer focus from long-term to short-term survivability. As a result, Prudential Financial’s premium revenue suffered in the first two quarters of 2020. However, with some improvement in the economic conditions, the figure did improve in the third quarter – cumulative nine months net premiums are still slightly behind the year-ago period. The positive growth in the international insurance business over the first nine months is a positive sign followed by some recovery in the U.S. Workplace Solutions division in the third quarter. On the flip side, the lower interest rate environment is likely to harm its net interest income, which is very important for the profitability of any insurance company. While we expect the economic conditions to improve in the coming months, the interest rates are unlikely to see an immediate recovery. Overall, we expect Prudential Financial’s revenues to see some recovery in the subsequent quarters, boosting its stock price in the near term.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams