Prudential Financial, Inc.
Covering Analyst: Christian Meunier
meunier@uoregon.edu
Company Overview
› Founded in 1875
› Became a mutual company in 1915, offering group life
insurance
› Went public in 2001, splitting up the company into Closed
Block and Financial Service Business
› Has since expanded internationally, offering a variety of
products
› Manages over $1 trillion in assets
Product Offering
› Individual Life Insurance
› Group Life Insurance
› Asset Management
-Retirement Solutions
-Pension-Risk Transfers
-Opportunity to invest in mutual funds
Business Divisions
› U.S. Individual and Group Life Insurance (18%)
› International Insurance & Investments (41%)
› U.S. Retirement Solutions & Investment Management
(22%)
› Closed Block Business (14%)
› Corporate and Other (5%)
Business Growth Strategies
› Domestic Growth Strategies
-Acquisitions (Hartford Individual Life Insurance)
-Organic Growth (Verizon and General Motors pension transfers)
› International Growth Strategies
-Growth in Asia through acquisitions
-Continued presence in South America and Eastern Europe
› Joint Ventures
-China and India
Industry Overview
› Life Insurance and Annuities
-Expected annual growth of 3.4%
-Highly regulated both internationally and domestically
-Recent low interest rates have halted growth
-Highly saturated U.S. industry has led to international growth
-No company in the U.S. has over a 4% share of the industry
-Ageing population in Japan and U.S. will improve sales
Macro Factors
› Prudential is highly dependent on economic conditions
-Group Life Insurance sales
-Individual Life Insurance sales
-Annuity revenue is dependent on investment gains
› Interest Rates
-High percentage of investments are in bonds
Portfolio History
› Tall Firs
- 220 shares at $64.95. Purchased 10/02/2011
- 1.62% of portfolio, has returned -13.30%
› Svigals
- 40 shares at $63.46. Purchased 11/02/ 2011
Revenue Model
› Split into 5 divisions
› U.S. Individual Life and Group Insurance
–Improving economy
-Acquisition of Hartford Life Insurance
› International Insurance
-Foreign acquisitions will increase sales
-Aging population in Japan and Korea
› U.S. Retirement Solutions and Investments
–Pension transfers
-Recent growth has been slowed due to interest rate
Revenue Model Continued
› Closed Block Business
-Policies that were in place during demutualization
-Will expire
› Corporate and Other
-Averaged out the last five years to find fixed value
Working Capital Expenditure
› Very few current assets
- Included 50% of cash and cash equivalents in my model
› Trend of greater liabilities expected to continue
-Used up current assets for acquisitions
-Must have a positive working capital terminal year
› Company does not have capital expenditure
Discounted Cash Flow
› Benefits
- Policy pricing from acquisitions cannot be changed by Prudential
› General and Administrative Costs
- Cost projected as % of revenue
› Dividends to Policyholders
-Will increase in the future due to high competition
› Interest Expense on Policies
-Greater Investment income
-Set themselves apart from competition
Amortization and Depreciation
› Amortization of Deferred Policy Acquisitions
-Costs that have to do with selling new and renewed policies (commission)
-Constant rate, lowers towards end due to efficient distribution channels
› Depreciation
-Flat rate due to Prudential not increasing equipment with revenue
Beta
Beta
SD
Weighting
3 Year Daily Regression
1.74
0.07
50.00%
5 Year Weekly Regression
2.24
0.06
10.00%
1 Year Daily Regression
1.69
0.02
20.00%
3 Year Weekly Regression
1.68
0.02
20.00%
Prudential Financial, Inc. Beta
1.768
Final DCF Valuation
Discounted Free Cash Flow Assumptions
Tax Rate
28.00% Terminal Growth Rate
Risk Free Rate
1.89% Terminal Value
Beta
1.768 PV of Terminal Value
Market Risk Premium
Considerations
3.00%
64525.60
Avg. Industry Debt / Equity
68.68%
40,924
Avg. Industry Tax Rate
26.75%
7.00% Sum of PV Free Cash Flows
15,743
Current Reinvestment Rate
26.38%
% Equity
49.92% Firm Value
56,667
Reinvestment Rate in Year 2017E
7.59%
% Debt
50.08% Total Debt
26,858
Implied Return on Capital in Perpetuity
39.52%
Cost of Debt
5.38% Cash & Cash Equivalents
13,102
Terminal Value as a % of Total
72.2%
CAPM
14.27% Market Capitalization
29,809
Implied 2013E EBITDA Multiple
11.2x
WACC
9.06% Fully Diluted Shares
468
Implied Multiple in Year 2017E
5.2x
Implied Price
63.69
Free Cash Flow Growth Rate in Year 2017E
3%
Current Price
57.21
Undervalued
11.34%
Comparable Analysis
› Looked at market capitalization, product offering, beta,
geographic sales and growth.
› MetLife (35%), Aflac (35%), Principal Financial Group
(20%), Manulife (10%), AIG (0%)
Multiples
Multiple
Implied Price
Weight
EV/Gross Profit
$79.05
40.00%
EV/EBITDA
$45.38
60.00%
Price Target
$58.85
Current Price
$57.21
Undervalued
2.86%
Final Valuation
Final Implied Price
DCF Analysis
65.00%
63.69
Comparable Analysis
35.00%
58.85
Current Price
$57.21
Price Target
$62.00
Undervalued
8.37%
Catalysts
› Upside
-Increase in interest rates
-Entry into China and India
-Decreased regulation
› Downside
-Continued high unemployment
-Interests remain at historical lows
Questions?
Recommendation
› Hold in both portfolios
› Withstood difficult economic conditions
› Strong global position
› Intelligent acquisitions