Can Sustained Business Growth Drive Positive Results For Prudential?

-11.48%
Downside
117
Market
104
Trefis
PRU: Prudential Financial logo
PRU
Prudential Financial

Prudential Financial (NYSE: PRU), one of the leading insurance companies in the world, has delivered mixed results in recent quarters. Last quarter, the company’s revenue missed market expectations but earnings per share beat estimates. Moreover, the company’s stock has underperformed for the better part of this year as the price declined from around $116 at the start of the year to $94 in June. That said, the stock seems to be on the path of recovery as it has been on an upward trend since the start of July and recently reached triple digits again. The company is scheduled to announce second-quarter earnings on August 1 after the market closes and we expect it to report a robust quarter, driven mainly by strong performance of the Retirement and International Insurance businesses. We expect Prudential to report earnings of about $3.12 per share on revenues of $13.43 billion for the quarter, based on our interactive model for Prudential Financial. Moreover, we maintain our $118 price estimate for Prudential, which is ahead of the current market price. Below we take a look at some of the key trends that we will be watching when the company reports earnings.

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Surprisingly, Prudential did not convert any Pension Risk Transfer (PRT) transactions in the first quarter of 2018. It is one of the leading companies in the PRT market, and has over $65 billion in funded pension account values. Also, the company has significant penetration in the U.K. PRT market. The company realized over $9 billion of positive net flows in 2017. While this level of success may not be repeatable in the coming quarters, we still expect that Prudential’s expertise in such transactions will fetch high-level deposits given that plan sponsors are getting increasingly interested in PRT transactions. That said, the company saw net outflows in investment-only stable value business, and this will likely continue in the near term. The Group business should continue to see positive growth on the back of solid sales of both group life and group disability products.

International Insurance To Deliver Stable Results

International Insurance is Prudential’s largest segment, contributing about 36% of total revenue. Although sales in Japan, the largest market for Prudential in Asia, have saturated, the company’s efforts to increase sales of USD-denominated products have reduced the volatility. We expect this strategy to boost the sales of Gibraltar Life products. Also, the company continues to expand in China, Malaysia, and Brazil. With lower life insurance penetration in markets such as Malaysia, there is definite potential for growth.

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