Investors in leading global financial services company Prudential Financial, Inc. (NYSE:PRU) have enjoyed a remarkable revival in its stock performance since bottoming out in March 2023.
Dip buyers who didn't heed the doomsday predictions in the financial media and focused on Prudential's robust core earnings have performed well. PRU has also outperformed the S&P 500 (SPX) (SPY) on a total return basis since my previous Buy rating in April. I observed that buying sentiments in PRU remained robust and alerted investors that "buyers are returning after March's exodus."
Therefore, I believe it's opportune for me to update whether the recent buy levels are still appropriate for investors considering adding more exposure. Keen investors should recall that Prudential reported its second-quarter or FQ2 earnings release in early August. It should be clear by now that Prudential's adjusted operating EPS has continued to improve despite the volatility that affected its GAAP earnings.
As such, I ascertained that the market is looking forward as interest rates are on the verge of peaking. In addition, the company has moved to de-risk its business, as it moved out a $10B block of variable annuity business to reinsurers. It's also on track to de-risk $12.5B of guaranteed universal life policies, as it focuses on higher-growth and less market-sensitive areas.
As such, investors should observe the company's momentum in its fee-based asset management business while it expands its insurance business into higher-growth regions. The company has a "significant partnership with Mercado Pago" in LatAm. Mercado Pago is the fintech platform of leading LatAM e-commerce leader MercadoLibre (MELI), providing Prudential competitive "access to the mass market in Latin America and is showing promising growth." Prudential highlighted that its Brazil life insurance operations have attained significant scale, becoming "the third-largest life insurance company in the country, with rapid growth and 3.5 million customers."
Coupled with its robust balance sheet, Prudential remains well-primed to support further upside, including capital allocation activities to bolster shareholder value. Given its relative undervaluation (assigned a "B" valuation grade by Seeking Alpha Quant), market operators are likely still discounting the execution risks related to its business transformation as it navigates the current market volatility.
Despite that, Raymond James (a research firm) highlighted that it sees Prudential able to increase its stock repurchase authorization to $2B in 2024. The thesis is predicated on Prudential's robust balance sheet, with a "favorable capital position compared to its target buffer." Accordingly, Prudential's financial position is highly robust, with cash and liquidity of $4.5B at the high end of its target range of $3B to $5B. Its regulatory capital ratios are also "well above targets," providing credence to the thesis that Prudential could enhance its stock repurchase authorization to drive shareholder value further.
PRU's price action suggests it's still recovering from its hammering in March. The damage was pretty significant, although the worst seems over, as seen above.
I noted that PRU's robust short-term price action suggests that its August lows seem robust. However, buyers must maintain the current momentum to reverse it from its medium-term downtrend.
However, I assessed that market pessimism is reflected in its current valuation. Coupled with an expected growth inflection in its adjusted operating EPS through FY24, the market has likely not baked in a significant recovery yet.
Therefore, high-conviction investors should capitalize on steep pullbacks to add more positions, given the attractive valuation and constructive price action.
Rating: Maintain Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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