Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Prudential Financial Inc (PRU) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Prudential Financial, Inc., is a financial services company. The Company, through its subsidiaries, offers a range of financial products and services, which includes life insurance, annuities, retirement-related services, mutual funds and investment management. The Company’s operations consists of four divisions, which together encompass seven segments. The U.S. Retirement Solutions and Investment Management division consists of Individual Annuities, Retirement and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of Individual Life and Group Insurance segments. The International Insurance division consists of International Insurance segment. The Closed Block division consists of Closed Block segment. The Company has operations in the United States, Asia, Europe and Latin America.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass all 6 of the following tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$47,577,544,438||Pass|
|2. Earnings Stability||Positive EPS for 10 years prior||Fail|
|3. Dividend Record||Dividend Payments for 10 years prior||Pass|
|4. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||215.07%||Pass|
|5. Moderate PEmg Ratio||PEmg < 20||12.36||Pass|
|6. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.04||Pass|
|Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.|
|1. Earnings Stability||Positive EPS for 5 years prior||Fail|
|2. Dividend Record||Currently Pays Dividend||Pass|
|3. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||15.00%|
|MG Value based on 3% Growth||$130.51|
|MG Value based on 0% Growth||$76.51|
|Market Implied Growth Rate||1.93%|
|% of Intrinsic Value||32.10%|
Prudential Financial Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years. The Enterprising Investor has concerns regarding the lack of earnings stability over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.39 in 2013 to an estimated $9 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.93% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Prudential Financial Inc revealed the company was trading below its Graham Number of $162.19. The company pays a dividend of $2.8 per share, for a yield of 2.5%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 12.36, which was below the industry average of 20.16, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
Prudential Financial Inc receives an average overall rating in the ModernGraham grading system, scoring a C.
Stage 3: Information for Further Research
|Number of Consecutive Years of Dividend Growth||8|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||3/1/2017|
|Long-Term Debt & Capital Lease Obligation||$20,072,000,000|
|Shares Outstanding (Diluted Average)||439,100,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$10.95|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$9.00|
Other ModernGraham posts about the company
|Prudential Financial Inc Valuation – February 2016 $PRU|
|5 Speculative and Overvalued Companies to Avoid – December 2014|
|27 Companies in the Spotlight This Week – 12/20/14|
|Prudential Financial Inc. Annual Valuation – 2014 $PRU|
Other ModernGraham posts about related companies
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.