As Ameriprise Financial (AMP) becomes increasingly associated with asset management, it is only natural that its multiples rise to those of peers. The Street is currently bullish about the stock and rates it near a "strong buy". Principal Financial (PFG), which could be more solidly classified as a life insurer, however, is rated a "hold". I find that while the latter comes with greater risk, both financials are "strong buys".
From a multiples perpsective, Ameriprise is the cheaper of the two. It trades at a respective 11.5x and 9.2x past and forward earnings while Principal Financial trades at a respective 12.2x and 8.6x past and forward earnings. Even though Principal Financial is 40% more volatile than Ameriprise, it has the highest dividend yield of competitors at 2.6%. This compares to 2.1% from Ameriprise, 2% from MetLife (MET) and 2.1% from T. Rowe Price (TROW). With T. Rowe trading at a respective 20.6x and 19.3x past and forward earnings, Principal Financial has some room for multiples expansion.
At the third quarter earnings call, Ameriprise's CEO, Jim Cracchiolo, noted strong performance:
"Overall, we generated another solid quarter despite very challenging market conditions and we continue to demonstrate the strength of our diversified business model. In our Advisory business, earnings were up nicely and our advisors remained highly productive. In Asset Management, our net outflows increased primarily due to the equity market weakness and volatility. However, the business still produced solid earnings.
At the same time, our Insurance and Annuity businesses generated solid underlying performance despite significant market impacts, the related DAC unlocking and some catastrophic losses in Auto and Home. Our strong financial foundation continues to serve us well. We're maintaining more than $2 billion in excess capital. We're continuing our investments for future growth and we've accelerated our share repurchases".
Management is committed to returning free cash flow. It repurchased nearly $450M worth of shares in the quarter and returned 150% of operating earnings through capital allocation. The post-Columbia company features about fourth-fifths of earnings coming from equity-market-sensitive solutions, which will result, in my view, inevitably in multiples expansion. While the Columbia mutual fund acquisitions have been disappointing thus far, it has enabled the company to increase scale, establish a more comprehensive marketing platform, and improve flows. Net flows may be negative of late, but they are gaining momentum in 2012 putting the company in a solid position to achieve its ROE target of 15 - 18%.
Consensus estimates for Ameriprise's EPS forecast that it will grow by 12.8% to $5.04 in 2011 and then by 17.7% and 14.7% more in the following two years. Assuming a multiple of 12.5x and a conservative 2012 EPS of $5.87, the rough intrinsic value of the stock is $73.38, implying 34.2% upside. Even if the multiple were to decline to 10x and 2012 EPS turns out be 4.7% below consensus, the stock would still appreciate.
As for Principal Financial: the company anticipates $6B worth of retirement fund flows and $6 - 8B worth of inflows for international. At the same time, margins are eroding in FSA mostly due to the impact of lower interest rates and greater competition. Management is aiming for upwards of $675M worth of capital deployments in acquisitions and share repurchases. ROE is forecasted to decline by around 285 bps to 6.2% in 2013.
Consensus estimates for Principal Financial's EPS forecast that it will grow by 6.9% to $2.80 in 2011 and then by 12.1% and 14.3% more in the following two years. Assuming a multiple of 12.5x and a conservative 2012 EPS of $3.09, the rough intrinsic value of the stock is $38.63, implying 39.5% upside. Again, even if the multiple were to plummet to 10x and 2012 EPS turns out to be 6.4% below consensus, the stock would still appreciate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.