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Is Prudential Financial on the Road to Recovery in 2016?

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Challenges to earnings growth

Prudential Financial (PRU) reported earnings per share (or EPS) of $2.18 in 1Q16, which was lower than the estimates of $2.36 and lower than $2.65 in the corresponding period last year. The stock has recovered 20% in the past three months after dropping over 30% in the last two years. The adverse impact of weaker non-coupon investment results, lower average equity markets, and foreign currency headwinds caused revenue contraction and lower profitability.

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Going forward, the company is expected to report EPS of $2.51 in 2Q16 compared to $2.91 in 2Q15. Prudential is expected to generate EPS of $9.55 for 2016 backed by growth in retirement offerings. The stock is currently trading at a PE (price-to-earnings) multiple of 14x compared to the 11x–15x ratios of other major insurance players.

In 1Q16, Prudential’s revenues fell 4.4% year-over-year to $11.3 billion. It reported net income of $1.3 billion, or $2.9 per share, compared to a net income of $2.0 billion in the prior year’s quarter. On a constant dollar basis, the company saw a decline in both its International Insurance and its US Retirement Solutions segments.

Interest rates in Japan pose one of the major challenges for the company. However, the overall constant dollar sales growth of 12% was driven by US dollar products in Japan, where the company saw an increase in demand.

Insurance and asset management

Prudential Financial had ~$1.2 trillion worth of assets under management as of March 31, 2016. It has operations in the US, Europe, Asia, and Latin America. The company’s product offerings include retirement-related services, mutual funds, life insurance, investment management, and annuities. Prudential Financial offers these products and services to institutional and individual customers through proprietary and third-party distribution networks.

The Americas remain the major contributor toward the company’s top line. In the United States, Prudential Financial’s competitors include ACE (ACE), Chubb (CB), and Allstate (ALL). Together, these companies form 0.63% of the iShares MSCI ACWI ETF (ACWI).

Prudential Financial’s investment portfolio consists of public and private fixed maturity securities, equity securities, commercial mortgages and other loans, and other invested assets.

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