Prudential Financial’s (NYSE: PRU) stock rallied about 17% in 2019, with the company’s share price averaging just above $93 for the year. While the company’s stock price has mostly remained around this level since the beginning of the year, the recent sell-off across industries has pushed the figure below $85. We believe that the company’s stock is currently very undervalued.
Trefis details the key components of Prudential Financial’s valuation in an interactive dashboard along with our forecast for full-year 2020 and estimates the fair value of Prudential Financial’s stock to be $108 per share – roughly 25% higher than the current market price. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current fiscal year.
Notably, the insurance giant reported Total Revenues of $64.8 billion for FY 2019 – 3% more than the previous year. It reported a 47% increase in its Corporate & Closed Block division, which was the primary revenue driver, coupled with growth across U.S Annuities and International Insurance segments. The U.S business is significant for the company as it contributes to nearly 50% of its revenues. Although U.S. revenues fell in 2019 due to a drop in revenues from Retirement Solutions, growth in the Life Insurance segment reduced the negative impact on the top line to some extent. Going forward, we expect international markets to drive growth for the company, followed by some improvement in the U.S workspace solutions business.
We arrive at the stock price estimate for Prudential Financial as:
Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio
U.S Workspace Solutions Will Drive Growth In Prudential Financial’s Revenues For Full Year 2020
- Total Revenues have increased by 10% from $58.8 billion in 2016 to $64.8 billion in 2019, and are expected to grow 2% to $66.1 Billion in 2020
- This expected increase would be driven by a 2% y-o-y increase in U.S Workspace solutions followed by a 4% growth in the International Insurance segment, partially offset by a 5% drop in Corporate & Closed block division
- U.S. Workspace solution has contributed more than 30% of the total revenues over the last four years. The growth in 2020 would primarily be driven by a ~$300 million increase in the U.S. Retirement sub-segment.
- Also, U.S. Individual Solutions are expected to grow by 2% in the year.
Our interactive dashboard analysis, ‘Prudential Financial Revenues: How Does Prudential Financial Make Money?’, captures the factors that have driven changes in revenues for Prudential Financial’s segments over recent years along with our forecast for the next two years.
Higher Revenue Growth Would Boost The Net Income Figure
- Prudential Financial is expected to have a Net Income of $4.7 billion in 2020, which is 15% more than the previous year.
- This would be due to an increase in Net Income Margin from 6.4% in 2019 to 7.2% in 2020, partially offset by higher expected Tax Rate as compared to the previous year.
- Improvement in net income margin would be driven by faster growth in revenues as compared to the expense figure.
This Lends Support To A $108 Price Estimate For Prudential Financial’s Stock
- Prudential Financial has regularly invested in share repurchase to boost shareholder returns. Its share repurchase program is likely to touch $1.4 billion for the full year 2020.
- Higher adjusted net income, coupled with a steady decline in outstanding shares, should result in Prudential Financial’s EPS figure increasing to $12.18 in 2020.
- Using an 8.9x P/E Multiple on expected 2020 EPS of $12.18, this works out to our price estimate of $108 for Prudential Financial’s Stock.
Our interactive dashboard about Prudential Financial’s Valuation provides additional details about how the company’s P/E multiple compares with that for peers MetLife, AIG, and Hartford Financial.