Prudential: Cheapest in Sector

11/10/2015 7:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

The over-65 population is growing three times faster than the 20-to-65 population in the US, Europe, and China, observes J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

This bodes well for companies that offer investment management and annuity products and services.

Prudential Financial (PRU), a financial services leader with $1.2 trillion assets under management, has operations in the US, Asia, Europe, and Latin America.

Prudential offers investment management, group insurance, and other financial services; it is the third-largest life insurance and annuity company in the US and has operations in more than 40 countries.

Higher assets under management and increased pricing in the annuities business are boosting profits.

Revenues increased 15% and EPS advanced 4% during the 12 months ended September 30, 2015, aided by the purchase of Hartford’s individual life insurance business and significantly higher net investment income.

Prudential’s integration of Hartford’s individual life insurance business is producing better than expected results and international operations are improving.

Revenue will likely be flat for the next 12 months and EPS will increase 7% to $10.75. Interest rates in the US are expected to rise and could bolster Prudential’s results more than expected.

PRU is clearly undervalued. The company’s current P/E is 7.7, its price-to-book value ratio is 0.85 and the dividend yield is 3%. Its price earnings-to-growth ratio is 0.68.

Prudential generates high, above-average profit margins, driven by the strength of its international business and strong asset management, yet its valuation is the cheapest in the sector.

I expect PRU to advance 26% to my $96.38 minimum sell price target within one year. Buy at the current price.

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