Prudential Financial Stock has limited upside potential

Prudential Financial (NYSE: PRU) stock fell nearly 59% – from $ 95 in late 2019 to around $ 39 in late March – then climbed 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 improvement in Prudential Financial’s revenue trajectory 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. Newly released consumer spending data for the United States, which shows month-on-month growth of 8.5% in May, followed by 5.6% month-on-month in June, lends even more weight to our expectations. If the trend continues in the coming months, it should improve both the net premium figure and the 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 few months. Net profit for the year is expected to fall to $ 3.6 billion, down 14% year-on-year, bringing 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 allow EPS’s figure to hit $ 10.09 for fiscal 2021, a 10% year-over-year increase.

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 need to deposit around $ 1110 into a savings account today, which is around 110 times your desired earnings. At the current Prudential Financial share 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 can be seen among the peers of Prudential Financial – 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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