Yahoo Finance Prudential at Multiyear Low Valuations: Is Recovery in the Cards?
What Are Prudential Financial's Targets for 1Q16?
Marginal recovery
Prudential Financial’s (PRU) stock has risen by 7% in the past month, mainly due to expectations of improved fundamentals, higher investment, and underwriting income.
Prudential’s operating income fell in 4Q15 due to the weak performance of its US Retirement and Asset Management segment and its International Insurance segment’s being impacted by the strong dollar.
Prudential’s premium earnings are expected to rise along with its investment and asset management income in 1Q16.
Valuations
Since insuring is a balance sheet–driven business, insurers are generally valued on the basis of their book values. Prudential Financial is trading at a one-year forward price-to-book multiple of 0.8x. Its peers are trading at an average of 1.0x.
At its current price-to-book multiple of ~0.9x, Prudential Financial is trading more cheaply than other insurers, including Allstate (ALL), ACE (ACE), and Chubb (CB). However, Prudential is trading at a premium compared to major players such as AIG (AIG) and Metlife (MET). Both are trading at 0.8x.
On a one-year forward price-to-earnings basis, Prudential Financial is trading at 7.3x compared to the industry’s 10.0x for the same period. The stock is currently trading at multiyear low valuations.
Currently, Prudential Financial’s shares appear to be undervalued. However, on the whole, the industry is facing a slowdown in terms of new business as well as lower investment income on lower interest rates. Marginal improvement in operating performance is expected in the upcoming quarters as the global economy and commodities stabilize. The expected rise in interest rates could also boost the company’s investment management revenues.
Investors can gain exposure to insurance companies by investing in financial sector ETFs such as the Financial Select Sector SPDR ETF (XLF).
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