We are maintaining our Neutral recommendation on the shares of
Prudential Financial Inc.
), prior to the release of its third quarter earnings on November
7. The Zacks Consensus Estimate is currently pegged at $1.65 per
share, translating into a year-over-year growth of 55%.
Prudential is the second-biggest U.S. life insurer and has a
sizable business in the nation's life insurance sector, with strong
positions in high-margin businesses and a diversified portfolio.
Although there was a drag on revenues in the recent past due to the
volatile economic environment, the company has consistently
recorded increased revenue over the past several quarters.
Prudential has a strong international presence that provides it
with better organic growth opportunities than its peers. Prudential
has a strong footprint in Japan, with operations in the region for
over thirty years. It is also expanding in China to tap the
fast-growing Chinese life insurance market that has expanded almost
30% a year, on average, over the past three decades.
Prudential has been focusing closely on three areas - Asset
Management, Annuities and International - and axed other allied
businesses such as Health Care, Property and Casualty, Retail
Brokerage, Investment Banking and Commodities. Management expects
to generate ROE of 13%-14% by 2013 by disposing less profitable
businesses that have diminished overall returns.
Our Neutral recommendation is based on our cautious near-term
outlook on Prudential's exposure to products, which guarantees
minimum return like annuities and universal life, will keep capital
under strain. A low interest rate environment will increase the
value of these liabilities, which might lead to additional reserve
accretion. Though the company has put hedging and risk management
strategies in place, these might prove insufficient, thereby
negatively affecting the operating results.
Moreover, Prudential's investment portfolio remains a source of
threat because of its high exposure to commercial real estate,
through Commercial Mortgage Loans and Commercial Mortgage Backed
Securities, hedge funds and partnerships. We, however, view
positively Prudential's effective capital management.
A right mix of business and strong fundamentals has helped
Prudential garner market share from weak competitors. Prudential is
poised to improve its earnings faster than its peers -
American International Group Inc.
) - in the coming years.
Prudential's stock retains a Zacks #3 Rank, which translates
into a short-term Hold rating.
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PRUDENTIAL FINL (PRU): Free Stock Analysis
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