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Prudential’s Valuations Fall amid Weakening Economy and Industry

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Jan. 19 2016, Updated 8:05 a.m. ET

Falling stock prices

Prudential Financial’s (PRU) stock fell by 7% over the past three months, mainly due to an expectation of weaker operating performance, lower underwriting business, and higher charges. Its operating income fell in 3Q15 due to the weak performance of Prudential’s US retirement and asset management, as well as its international insurance business getting impacted by a strong dollar.

Prudential’s premium earning is expected to fall along with lower investment and asset management income in the fourth quarter of 2015. The lower outlay for insurance and annuity benefits helped in boosting the adjusted operating income to $1.11 billion in 3Q15 as compared to $1.03 billion in 3Q14.

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Valuations

Since insuring is a balance-sheet–driven business, insurers are generally valued on the basis of their book values. Prudential Financial is trading at a one-year forward price-to-book multiple of 0.8x, compared to its peers trading at 1.0x. At a current price-to-book multiple of around 0.9x, Prudential Financial is trading more cheaply than other insurers, including Allstate (ALL), ACE (ACE), and Chubb (CB). However, Prudential is trading at a premium when compared to major players like AIG (AIG) and Metlife (MET), both trading at 0.8x.

On a one-year forward price-to-earnings basis, Prudential Financial is trading at 7.2x, compared with the industry’s 8.8x earnings multiple for the same period. The stock is currently trading at multiyear low valuations.

Prudential Financial’s shares appear to be currently undervalued. However, the industry, on the whole, is facing a slowdown in terms of new business as well as lower investment income on lower interest rates. There is an expectation of subdued operating performance in the upcoming quarters as the global economy is slowing due to China and commodity prices. The expected rise in interest rates could also boost the company’s investment management revenues.

Investors can gain exposure to insurance companies by investing in financial sector ETFs like the Financial Select Sector SPDR ETF (XLF).

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