With RBC Capital reiterating its top rating on Prudential Financial (NYSE:PRU) with a target price of $90, it is very safe to say that the price is going to soar in the short term (good for the day traders!). But it is wise to take the long term potential of the company into account before we make any investing decisions.
Shares of Prudential Financial are currently trading at $55.2 (at the time of writing this article). It has a 52-week low of $44.47 and a 52-week high of $61.94. The stock's 50-day moving average is currently $57.85, which is still above the spot price. It must be noted though that the company's PE ratio of 61.19 is currently far higher compared to 6.81 of Lincoln National Corporation (NYSE:LNC) and 34.1 of MetLife Inc. (NYSE:MET).
That said, the graph below makes it clear that the price-earnings valuation of the company is much bloated at the moment. Again with a current book value of $39.29, the stock is overvalued by 40.5%. The question is whether we should focus on the historical values or rather shift our attention on the forward estimates.
With $597 million worth investments being sold and a drop of 87% in income from continuing operations (before income from other joint ventures), the company's income statement does not look too good to me.
While premiums rose by 195%, insurance and annuity benefits rose by 206%. Add another 1% to that, due to interest credited to policy accountholders. Rising premium income is good for insurance businesses, indicating better market presence and expansion. But lower bottom line can push any company toward bankruptcy.
Around $46.5 billion of net additions in the investment management segment offsets net withdrawal of $2.8 billion dollar in the retirement section. Although there has been a significant increase in the variable annuities account, up by $13.33 billion in December 2012, there has been a general downslide in the total retirement account sales by financial planners, insurance agents and bank distributors in overall, compared to last year's numbers. Are the retirees resorting to riskier options? With the current low interest rate, it is highly likely that Americans are moving on to higher-yield options.
Insurance premiums showed no growth while interest and annuity payments shot up by 9% due to the changing product mix and variable interest rates. It is because of the fact that variable life insurance assets went down while universal life and term life assets went up, thus pushing up the expenses of the segment. In the international insurance segment, there has been strong rise in premium income, with Gibraltar Life insurance being a major contributor in the revenue income. With LT capital debt of over $5 billion and LT operating (investment related) debt of over $9 billion at the moment, the company seems highly leveraged, which might further constrict the bottom line.
However, capital investments need to be made. Even companies like MetLife, which might be involved in some huge Charlotte project, have been pretty active in making capital investments. With over 1000 employees rumored to be added there, it is safe to say that other companies are doing their bit too.
The question is whether this high leverage and high capex ratio getting any positive results or not. Well, the company already seems to be reaping the benefits of it. Looking at the graph below, it is safe to say that cash flow from operations has increased substantially, generating higher free cash flow.
With over $250 billion invested in fixed maturities available for sale, the company is turning its focus more toward investment management, rather than the insurance and annuity business. Hopefully, it turns out to be good in the recovering US economy.
To sum it up, the company seems financially fine to me right now. With rising premiums and more focus on the investment management business, it should be able to weather storms coming its way in the future (if any).
And with the current average price estimate of $68.47, there is some nice profit looking to be made of this stock. Unless you are following the big money to Lincoln National (yes, hedge funds are rumored to be favoring Lincoln National at the moment), you can bet your money on this company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.