Does The Recent Rally In Prudential Financial Stock Mean – Opportunity?

Despite a 54% rise since the March 23 lows of this year, at the current price of around $60 per share, we believe Prudential Financial’s stock (NYSE: PRU) has more room to grow. Prudential Financial’s stock has rallied from $39 to $60 off the recent bottom compared to the S&P which moved 43%. Investor sentiment toward insurance companies has improved over the recent weeks driven by government stimulus and net market gains, resulting in PRU outperforming the overall markets. However, the Stock is still 35% below the levels seen in late 2019.

PRU’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. After the healthy rise since the March 23 lows, we feel that the company’s stock still has some potential as its historic PE multiples imply it can grow further from current levels. 

While Prudential Financial’s revenues grew by roughly 10% over 2016 to 2019, the Net Income figure decreased by 4%. This could be mainly attributed to an increase in expense (policyholder benefits, and Interest credited to policyholders’ account balances) as % of revenues, which reduced the net income margin figure from 7.3% to 6.45 over the same period. The effect of the lower profitability margin was evident in the earnings growth, which grew by just 4% on a per share basis.

Although the company has seen steady revenue growth over recent years, its PE multiple has seen some negative movement. We believe the stock is likely to see some upside beyond the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard ‘Why Prudential Financial Stock moved -34% between 2016 and now‘ has the underlying numbers.

Prudential Financial’s PE multiple changed from around 9.5x in 2016 to 9x at the end of 2019. While the company’s PE is down to about 6x now – slightly higher than the multiyear low, there is some upside potential when the current PE is compared to levels seen in the past years – PE of 9x at the end of 2019 and 8x as recent as late 2018.

So what’s the likely trigger and timing for further upside?

The current Covid-19 crisis could result in lower premium revenues for the company as business and individuals would be more focused on the short term. Further, it is likely to increase the insurance claim liability of the company in the near term. In addition to this, the insurance company is heavily dependent on income from investment of insurance premiums for its profitability, which is going to suffer due to lower asset valuations driven by the economic slowdown. However, the recent improvement in the securities market has given some hope to this revenue stream. While the Q1 2020 results were on similar lines, we believe that Q2 results will confirm the hit to its revenue. It is also likely to accompany a lower Q3 as-well-as 2020 guidance.

However, following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view — where the valuations vs historic valuations become important in searching for value.

That said, if there isn’t clear evidence of containment of the virus over the next couple of months, or if there is a second wave of infections in the country, the stock could potentially see another dip. Under such a scenario, the P/E multiple could decline even as the earnings forecast for the current year is revised lower again.

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. It complements our analyses of Coronavirus impact on a diverse set of Prudential Financial’s peers. The complete set of coronavirus impact and timing analyses is available here.

While Prudential Financial stock has growth potential, there can be an even bigger opportunity when you compare Discover Financial with Mastercard.

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