Earnings look-ahead: Prudential

The cooling of the Chinese economy is putting pressure on Prudential’s share price.

Prudential will announce its full-year figures on 9 March, and traders are anticipating revenue of £59.9 billion and an adjusted net income of £2.78 billion. These forecasts equate to a marginal drop in revenue and an 11.51% decline in adjusted net income. The company will also reveal its second-half numbers on the same date, and investors are expecting an operating profit of £1.89 billion.

Profits are still rising at Prudential but there are a few signs the turmoil in global financial markets and the uncertainty in the world economy are taking its toll on the share price. Prudential did very well over the years by tapping into the Chinese middle class. The business performed well so far this year – but there has been a slowdown in sales in the latest quarter as the outlook in China is no longer as positive as it once was.

China is not the only country in the region that is cooling down, Indonesia and Singapore are also coming off the boil and this also had a negative impact on Prudential’s business. Traders associate Prudential with Asia, and as the region moves towards a soft landing the stock will be under pressure. To make matters worse, Prudential’s US business is also experiencing lower sales. The volatile moves in the financial markets has prompted investors to withdraw cash from the company’s fund management arm which is adding to its problems.

Lofty valuation

  12 month trailing price/earnings 12 month forward price/earnings Price/book value Dividend yield 5 year dividend growth
Prudential 12.07 10.79 2.52 3.57% 13.54%
Standard Life 25.93 11.76 1.56 6% 48.07%
Aviva 11.53 9.13 1.08 5.11% -4.96%
Legal and General 12.30 11.14 2.1 6.14% 23.79%
FTSE 100 29.65 15.72 1.72 4.58% N/A

 

Prudential’s 12-month trailing price to earnings ratio is in line with the majority of its competitors, and the decline in forward looking price to earnings indicates earnings will rise. The company has a very high price to book value, and it is high even by the insurance sector’s standards. Prudential’s dividend and dividend growth rate is not overly impressive when compared with the rest of the industry. Investors will be mindful of the high valuation an underwhelming cash pay-out.

Earnings vs expectations
Out of the past five full-year announcements the revenue exceeded the expectation 100% of the time and the earnings per share (EPS) topped the forecasts 80% of the time. We can expect volatility on the day of the announcement, and stock moved on average 4.97% on the day of figures being released and 80% of the moves have been positive. 

Prudential revenue chart

There is a reasonable correlation between the revenue performance and share price movement on the day of the results being released.

Prudential EPS chart

There is a strong correlation between the EPS performance and the share price movement on the day of the figures being announced.

Banks are bullish

  Buy ratings Hold ratings Sell ratings
Prudential 18 6 0
Standard Life 8 10 2
Aviva 16 3 3
Legal and General 11 5 5

 

Equity analysts are very bullish on Prudential and it has the highest percentage (75%) of buy ratings attached to it from the list of insurers above. Investment banks have an average target price for Prudential of £17.27, which is 40% above the current price.

Prudential’s shares have been sliding since December and the creation of lower lows and lower highs points to further declines. The share price has been trapped in the £12.61 to £11.77 range since mid-February and traders are looking for a breakout. If there is an hourly close below £11.77 it would be a bearish indicator and the next major support level in sight is £10.85. Should we see an hourly close above £12.61 it would be a bullish signal and the next big resistance level on the horizon is £13.76.

Prudential chart

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.