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Prudential Financial’s Valuations Rise, Still Trade at a Discount

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Stock appreciation

Prudential Financial’s (PRU) stock has appreciated by more than 12% over the past six months, mainly due to its strong operating performance, improved risk adequacy ratio, and declining leverage on its balance sheet. Its operating income increased in 2Q15 with a strong performance in its individual life business, followed by its retirement segment performance.

The company’s second quarter results have also benefited from the expected rise in interest rates in the upcoming quarters.

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Valuations

Being a balance sheet–driven business, insurers are generally valued on the basis of their book values. Prudential Financial is trading on a one-year forward price-to-book multiple of 0.91x, compared with its peers trading at 1.10x. At a current price-to-book multiple of around 0.97x, Prudential Financial is trading more cheaply than other insurers, including Allstate (ALL), ACE (ACE), and Chubb (CB). On a one-year forward price-to-earnings basis, Prudential Financial is trading at 8.45x, compared with the industry’s 10.50x earnings multiple for the same period.

Prudential Financial’s shares appear to be currently undervalued despite the improvements in its overall fundamentals. There is an expectation of improved operating performance in the upcoming quarters, backed by the expected increase in retirement funds, assets under management, and the rise in asset-based fees. The expected rise in interest rates should also help boost the company’s investment management revenues.

Investors can gain exposure to insurance companies by investing in financial sector exchange-traded funds like the Financial Select Sector SPDR ETF (XLF) and the iShares US Financials ETF (IYF).

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