Principal's Strength Intact

Employee-benefits leader Principal Financial (NYSE:PFG) warned that the sale of its mortgage banking unit to Citigroup (NYSE:C) might make for some difficult near-term earnings comparisons. A 41% decline in second-quarter net income to $119.7 million ($0.37) from $202.2 million the year before may have been a tad steeper than management was forecasting, but the company continues to thrive where it counts: retirement services, investment products, and asset management.

The bulk of the drop in earnings is tied to the sale of Principal's discontinued mortgage banking business. Operating income, which is a more accurate gauge of performance at this point, grew 5% to $173.4 million, or $0.54, on revenues of $2 billion. Both measures, however, fell short of estimates calling for $0.58 in earnings and $2.28 billion in revenues. The stock dropped about 4% in response.

Most of the firm's pockets of strength continue to be found in its U.S. Asset Management and Accumulation. Fortunately, this core segment is the company's largest, representing roughly half of revenues and nearly 70% of operating earnings. Driven by a 12% jump in pension business and record results from Principal Global Investors, the firm's investment management division, operating income rose 15% to $121.7 million. Segment assets under management climbed 19% to $127.6 billion, also a new record, helping overall fee revenue rise 32% (the fastest-growing revenue component) to $364.2 million.

As the nation's leading 401(k) provider, Principal raked in another $1.2 billion in pension sales, lifting revenues in this critical category by 33% to a record $56.6 million. With broad-based economic growth lifting stocks and expanding the labor pool, Principal, as well as rivals such as Manulife Financial (NYSE:MFC), T. Rowe Price (NASDAQ:TROW), and AXA Advisors (NYSE:AXA), should continue to see healthy inflows into employer-sponsored retirement plans and related investment and insurance products.

Principal's second quarter saw a number of key metrics reach record highs, but overall growth rates slowed. Furthermore, the firm's other two segments -- International Asset Management and Life and Health Insurance -- saw mixed results, with declining earnings in both because of one-time items. These divisions will play a larger role now that the cyclical, but at times very profitable, mortgage banking business has been removed from the picture.

Nevertheless, with an immense client base, record assets under management, after-tax proceeds of $720 million from the mortgage sale awaiting deployment, and an enterprise value-to-free cash flow ratio of only 3.1, Principal clearly deserves consideration for investors interested in the financial services sector.

Fool contributor Nathan Slaughter owns none of the companies mentioned.