Prudential Financial: Keep Holding Through This Period Of Uncertainty

Summary

• Prudential's stock has significantly underperformed the broader market so far in 2020.
• There are reasons for the poor stock performance - recession fears and a low interest rate environment - but I believe that this insurer will make a comeback in 2020.
• I am long Prudential, and I have plans to add to my position on pullbacks.

Prudential Financial's (NYSE:PRU) stock has taken a significant hit so far in 2020 due mainly to COVID-19 concerns (and the deteriorating interest rate environment). PRU shares have underperformed the broader market by over 20 percentage points on a year-to-date basis.

Data by YCharts

Investors should definitely be concerned about lower rates and the potential economic impact of COVID-19 but, in my opinion, this steep pullback will eventually turn out to be a great long-term buying opportunity. To this point, I believe that shareholders of this global insurer should use the current dip as an opportunity to add to their PRU positions.

The Concerns Are Valid But The Bank Is Well Positioned for 2020 And Beyond

It would be the understatement of the year to say that the insurance sector has felt the pain of the COVID-19 fallout.

Source: Fidelity

And, of course, the Fed's recent interest rate decisions are not helping either - i.e., the low interest rate environment was already negatively impacting Prudential's bottom-line.

Source: CNBC

But more importantly, the fallout from a slowdown in economic activity obviously has a significant impact on the insurers, so the downward trending stock prices should come as no surprise. To put this into context, Goldman Sachs expects major cutbacks in consumer activity almost across the board through at least April 2020 (I believe that this downturn will be a lot longer).

Source: Goldman Sachs

There is not a "direct" impact to Prudential's business but, indirectly, this is not great near-term news for the insurance industry. However, as I recently described here, Prudential has more going for it than just rising rates and I believe that the insurer is positioned to weather any near-term storms. For example, management previously disclosed that the insurer was positioned for a downturn.

Source: Investor Presentation, 11/2019

Management went up the value-chain with the portfolio and proactively took steps to mitigate the risk of a significant market pullback. And remember this presentation happened in late-2019, i.e., before the COVID-19 spread. Make no mistake about it, Prudential's investment portfolio will take some hits but I believe that the company was indeed well-position for this downturn.

So yes, there are legitimate concerns about Prudential's near-term business prospects but, in my opinion, let's not forget that this global insurance company entered 2020 in a great financial position and with solid credit ratings.

Source: Investor Presentation, 11/2019

Prudential is well capitalized and has a balance sheet that will allow for it to maintain during this period of uncertainty. Additionally, it's important to also note that U.S. economic activity is expected to recover after the Q2 bloodbath with a sharp snap-back in GDP predicted for Q3 2020.

Source: Goldman Sachs

So consider this, the current headwinds are predicted to eventually dissipate - it's not a matter of if, but when. Therefore, I believe that investors with a long-term mindset should use this opportunity to add a well-positioned insurer with great business prospects to their portfolios.

And lastly, two other bullish points to make: [1] Prudential pays an above-average dividend that is supported by earnings (i.e., paying you to be patient during this uncertainty), and [2] as bad as it sounds, an analyst from Keefe, Bruyette & Woods recently correctly pointed out that the COVID-19 risk may positively impact the long-term care business (a risk factor that has been center-stage for Prudential).

Valuation

Prudential's stock is attractively valued based on the insurer's own historical metrics.

Data by YCharts

Yes, PRU shares are that cheap. Additionally, Prudential's stock is trading at a discount when compared to its peer group based on two key metrics.

Data by YCharts

Prudential's business has been under pressure for the last few quarters, which makes sense given the challenging operating environment, but I believe that the risk for the stock is currently to the upside the further that you are willing (and able) to look out.

Risks

Regulatory concerns always need to be factored in when evaluating global insurers, and this includes Prudential. I believe that the regulatory environment is actually improving, but this could change in short order.

The biggest risk for any insurer, including Prudential, is the sufficiency of the company's reserves (including the long-term care book of business). The company will likely have immaterial one-off reserve charges on a somewhat consistent basis but any material adjustment could negatively impact Prudential's stock price.

And lastly, the Federal Reserve and rates are a concern right now, but investors need to also consider the macro environment. A deteriorating economy would eventually negatively impact the banking sector. The COVID-19 related impacts should be closely monitored in the months ahead. If the economy is "shut down" for longer than anticipated, Prudential's stock will likely continue its downward trend.

Bottom Line

2020 has been a tough year so far for Prudential shareholders but that's not a good reason to jump ship, especially at today's levels. I believe that this insurer is well-positioned for this year and beyond and, in my mind, Prudential will make a strong comeback once the broader market finds its footing.

The $2 trillion stimulus bill should help the economy, at least in the short-term, but investors should expect more volatility in the weeks/months ahead. But, I believe that Prudential shareholders with a time horizon longer than the next few quarters should treat any significant pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities.

Disclosure: I am/we are long PRU. 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.