Prudential does not perform well in the initial stages of the analysis, as it is not suitable for either the Enterprising Investor or the Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years along with the high PEmg ratio. The Enterprising Investor is concerned with the lack of earnings growth or stability over the last five years. Any value investor following the ModernGraham approach based on Benjamin Graham’s teachings should be very cautious proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
To determine an estimate of the intrinsic value, one must consider the company’s earnings. Here, the company has seen its EPSmg (normalized earnings) drop from $4.75 in 2010 to only an estimated $4.19 for 2014. This drop in earnings does not support the market’s implied forecast of 5.87% earnings growth over the next 7-10 years. The company would have to see a significant change in growth in order to be valued at the market’s current price. As a result, the ModernGraham valuation model returns an estimate of intrinsic value well below the price, supporting a clear conclusion that the company is significantly overvalued.
Disclaimer: The author did not hold a position in Prudential Financial (PRU) at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.