3 Reasons Why Prudential Financial Inc's Stock Could Rise

Prudential Financial is an excellent bet on improving fundamentals, premium momentum, and multiple expansion over the next two to three years.

Aug 25, 2014 at 5:43PM

Source: Company

Prudential Financial (NYSE:PRU)appears to be a great bet on increasing valuation multiples over the next couple of years. In addition, Prudential Financial, an industry leader in the life insurance space, could profit from further premium growth in both the U.S. and Japan as well as from a solidifying economic recovery.

I have been an outspoken bull on insurance companies for a long time and I still cannot help but like them. This is even more true when market leaders are concerned that have a lot of potential to grow earnings as the economy continues to improve.

To some extent, it is really an old song that is being played here: Financial businesses are top beneficiaries of an economic expansion as compared to defensive businesses such as telecoms or utilities which face a rather stable cash flow stream across business cycles. Consequently, I expect insurance companies to do extraordinarily well over the next two to three years. Of course, no one has a crystal ball, and even these bullish indicators may not be enough to cause the stock to rise -- other events could intervene. That said, let's dive right in.

1. Earnings growth and high profitability
Prudential has already benefited from stronger earnings over the last couple of years as well as higher profitability measures and I expect this trend to continue.


Source: Prudential Financial Investor Presentation June 9, 2014

While past performance records are not necessarily to be extrapolated, good records suggest that a company will be able to continue to perform equally well in the future.

With a return of equity of more than 15% in 2013, Prudential Financial has materially improved the efficiency of its operations since 2010 which should serve the company well going into an expansionary phase of the business cycle.

If Prudential Financial sees further premium growth over the next couple of quarters, the insurance company might be able to deliver quite a few handsome surprises on the earnings front which should help boost its stock price and company valuation.

2. Strong growth opportunity in Japan
Particularly noteworthy is Prudential's strong market position in the second largest market for life insurance companies: Japan.


Source: Prudential Financial Investor Presentation June 9, 2014

Japan is a very attractive market for Prudential as well as other life insurance companies, and poses significant growth potential. According to information from insurance company Swiss Re and Bloomberg, Japanese life insurance premiums stood at a whopping $524 billion in 2012: a huge growth opportunity for Prudential.

Moreover, Prudential Financial has been growing strongly over the last couple of years as it sought to capitalize on growth opportunities presented by the Japanese market.

As a result of its sales efforts, Prudential actually outperformed industry growth. And a lot of it has to do with the extraordinary consumer trust the insurance brand has earned over the last couple of years.

According to information from J.D. Power Asia Pacific, a market research firm, Prudential Japan achieved top customer satisfaction ratings in its life support insurance segment for four years in a row.

A reputation like this should certainly help further sales growth.

3. Valuation
Prudential Financial isn't cheap -- on a comparative basis -- but that doesn't mean the insurance company can't see further valuation growth. As one of the largest insurance companies in the United States and worldwide, Prudential Financial trades at the highest book value multiple when compared to MetLife and American International Group.


When it comes to market-leading insurance companies, and Prudential Financial is certainly among them with a market capitalization of $41 billion, so a buy-and-hold approach might be a good way to benefit from a Prudential investment.

Looking at the big picture, Prudential Financial has historically traded at much higher valuation multiples, and this is especially true in periods of market exuberance when investors rotate their funds into cyclical sectors such as financials.


The Foolish bottom line
Prudential Financial is an excellent bet on book multiple expansion over the next couple of years thanks to its low valuation compared to its own historical standards. Premium growth opportunities and momentum in the attractive Japanese market only add to the appeal of a Prudential Financial investment.


Kingkarn Amjaroen owns shares of American International Group. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers