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After Earnings, Underlying Trends Remain Strong

This insurance name reported earnings this morning, but how the stock performs will be all about the 2011 guidance.
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Prudential (PRU) reported a headline profit of $2.12 per share vs. the analyst consensus of $1.45. However, excluding 73 cents of positive items, core earnings were $1.38. Lower corporate earnings was offset by strong underlying operating trends particularly strong sales, inflows and fee based businesses. The strength in the company's core business bodes well for continued book-value growth and expansion of return on equity, and I expect 2010 earnings will climb after the report. Today's conference call is scheduled for later this morning at 11 a.m. EDT.

Still, when it comes to how the stock will perform today, it's really all about the 2011 guidance and the timing of the secondary offering to pay for Japan-based Star Life and Edison Life, which Prudential agreed to buy from AIG (AIG) in September. AIG's 2011 guidance is for earnings of $6.20 to $6.50 per share, but numbers are all over the lot, which is the reason it has underperformed the group in the last month.

As I have written in many Alerts, I have been waiting for a "dip" in the shares and will be a buyer if the stock is weak. Because of its investment-portfolio gains, Prudential has been a beneficiary of a higher stock market, has less earnings sensitivity on low interest rates and continues to dominate the international insurance business with lower-than-peer-average capital-intensive businesses in the U.S. (the Asset Management segment). The stock is cheap, as well, at 0.9 times tangible book value (which increased to $56.60) and 8.5 times normalized earnings.

Investors should also be pleased with the changes it made to the financing of Star Life and Edison, which is now being done with more cash, less debt and less equity. Those numbers now come to cash of $2.2 billion vs. $1.7 billion initially, debt of $1 billion in debt vs. the initial $1.2 billion, and $1 billion of common stock vs. the initial $1.3 billion. These changes adds about 6 to 8 cents per share in accretion to former expectations, and total per- share accretion is now projected at 46 to 48 cents in 2012.

The two positive callouts were the results in International Insurance and U.S. Asset Management. International posted record earnings of $531 million, compared with $530 last year, with the $500 million expectation driven by strong underlying demand growth, increased headcount, and new premiums. Gibraltar Life earnings rose 9%, and new business premiums increased 17%.

Meanwhile, Asset Management earned $148 million, which was an impressive gain from the $29 million reported last year -- a clear standout in the quarter. The number was driven by improved commercial mortgage, proprietary investments and margins (pretax margins grew to 32% from 27% sequentially). The Individual Annuities segment posted its second-highest quarter on record in terms of quarterly sales (of $5.4 billion) and net sales (of $3.7 billion). Earnings from the Retirement segment were flat year over year, although trends remain strong, with Full Service Retirement assets under management rising 7% year to date. Institutional Investment Products are up 18% year to date.

Results from U.S. Individual Life and Group Insurance were mixed, as Group continued to see some softness, with adjusted operating income down 4.5% year over year. That's in line with its peer group, but I'll want more information on this segment and on future visibility. Finally, Prudential's real estate and relocation business continued to turn around, reporting $19 million in earnings vs. $6 million a year earlier.

We'll get more details later this morning -- and 2011 guidance will be key. But the underlying trends (especially international) remain strong, and I'm a buyer.

Regards,

Jim Cramer, Stephanie Link, and the Research Team

DISCLOSURE: At the time of publication, Cramer was long PRU.

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