Prudential Financial Is Likely To Beat Earnings In Q1, But Is The Stock A Good Bet?

Prudential Financial (NYSE: PRU) is scheduled to report its fiscal Q1 2021 results on Tuesday, May 4 (after the market closes). We expect the company to beat consensus estimates for revenues and earnings. The insurance giant managed to surpass revenue and earnings estimates in the last quarter of 2020, mainly driven by growth in its investment management, international insurance, and U.S. workplace solutions businesses. Prudential Financial’s full-year 2020 revenues were down 12% year-on-year with its premiums suffering over the year primarily due to lower premiums in U.S. Workforce and U.S. Individual Solutions as a result of the Covid-19 crisis. It was accompanied by a slight drop in net investment income due to lower investment yields. Notably, the impact of weak growth in other segments was partially offset by a 16% y-o-y increase in investment management revenues driven by growth in Assets under Management (AuM). That said, both premiums, as well as net investment income, saw some improvement in the second half of the year, driven by a recovery in economic conditions. We expect the same trend to drive first-quarter FY2021 results as well.

Our forecast indicates that Prudential Financial’s valuation is around $87 per share, which is 13% below the current market price of around $100. Look at our interactive dashboard analysis on Prudential Financial’s pre-earnings for more details. 

(1) Revenues expected to be ahead of consensus estimates in Q1

Trefis estimates Prudential Financial’s fiscal Q1 2021 revenues to be around $15.50 billion, 8% above the $14.35 billion consensus estimate. Prudential Financial’s revenues of $57 billion for the full-year 2020 were 12% below the 2019 figure. It was primarily due to negative growth in premiums (down 9% y-o-y), which generates roughly 55% of the total revenues – the premiums mainly suffered in the U.S. Workforce, U.S. Individual Solutions, and international insurance segments due to the impact of the Covid-19 crisis. Interestingly, the company’s net investment income reduced by only 1% y-o-y in 2020 – in sharp contrast to the significant decline in this key revenue stream for its peers. This was due to the positive effect of higher customer account values that offset the negative impact of lower investment yields in the low-interest-rate environment. Also, the company witnessed a 16% y-o-y increase in its investment management revenues, driven by 15% growth in Assets under Management to $1.5 trillion. We expect the recovery in premiums and higher investment management revenues to driven first-quarter FY2021 results.

The Covid-19 crisis has led to negative growth in insurance premiums in 2020. However, with the expected recovery in the economy, premiums are likely to see some improvement. However, the lower investment yields are unlikely to see an immediate recovery to the pre-Covid-19 levels, as the interest rate headwinds are there to stay for some more time. That said, the net investment income will likely grow year-on-year due to higher net invested assets coupled with some improvement in the investment yield. Overall, PRU’s revenues are likely to touch $63.2 billion in FY2021. Our dashboard on Prudential Financial’s revenues offers more details on the company’s segments.

2) EPS likely to beat consensus estimates

Prudential Financial’s Q1 2021 adjusted earnings per share (EPS) is expected to be $2.86 per Trefis analysis, almost 4% above the consensus estimate of $2.76. The company’s adjusted net income recorded a steep drop from $4.2 billion to -$374 million in the year. This was mainly caused by an increase in benefits & expenses as a % of revenues from 92.2% to 100.6%, primarily due to higher general & administrative costs and higher policyholders’ benefits. It reduced the EPS figure from $10.23 to -$1.00. That said, the profitability figures have seen some improvement over the last two quarters, and we expect the same trend to continue in FY2021 Q1 results.

Prudential Financial’s top-line is expected to grow by 11% y-o-y in FY2021. Further, the net income margin is likely to recover close to the 2019 level. Overall, it will enable PRU to report an EPS of around $9.69 for the current year.

(3) Stock price estimate 13% lower than the current market price

Going by our Prudential Financial’s valuation, with an EPS estimate of around $9.69 and a P/E multiple of 9x in fiscal 2021, this translates into a price of $87, which is 13% below the current market price of around $100.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

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