2023-09-15 14:00:00 ET
Summary
- Jackson Financial reported an impressive FQ2'23 adj operating earnings of $283M (+4.4% QoQ/ +25.7% YoY), contributing to the healthier balance sheet with nearly $1.5B of liquidity (inline QoQ/ +87.5% YoY).
- The annuity company remains well positioned to achieve its 2023 capital return target of $500M at the midpoint, with $107M of dividends and $117M of shares repurchased in H1'23.
- The robust demand for Registered Index-Linked Annuity [RILA] products has also well balanced the stagnant sales for variable annuity and fixed annuity products.
- A Fed pivot by early 2024 may also allow JXN's medium/long-term hedging to play out more predictably while reducing the annuity company's volatility assumptions and risk margin.
- As a result of the highly competent management team, its prospects are likely to lift once the market demand for treasury yields and money funds moderates.
We previously covered Jackson Financial Inc. (JXN) in June 2023, discussing the stock's oversold status then, attributed to the March 2023 banking crisis. Its FQ1'23 earnings miss had also been misconstrued, since its hedging instruments were not structured to match GAAP accounting standards, causing the quarterly net losses or gains to appear overly inflated.
In this article, we shall be discussing its FQ2'23 results, which have brought forth improved profitability and a healthier balance sheet, naturally reversing the pessimistic sentiments. The stock's undervaluation and sustained share retirement also imply its great potential as a value play, while offering a rich dividend yield at the same time, resulting in our reiterated Buy rating.
The JXN Investment Thesis Remains Robust Here, Despite The Recent Recovery
For now, it appears that JXN's efforts have paid off, with FQ2'23 bringing forth improved total guaranteed benefits and net hedging results of $1.09B ( +157.7 QoQ / -51.7% YoY). This has directly contributed to its positive GAAP net income of $1.2B (+180.4% QoQ/ -63.1% YoY).
However, investors may want to refer to its adj operating earnings instead, since the metric will paint a more accurate representation of the annuity company's quarterly performance.
In the latest quarter, JXN reported impressive adj operating earnings of $283M ( +4.4% QoQ / +25.7% YoY ).
The improved profitability has directly contributed to the holding company's healthier balance sheet with nearly $1.5B of cash and highly liquid securities (inline QoQ/ +87.5% YoY), providing it with the much-needed "liquidity buffer of 2x annual expenses."
Therefore, it is unsurprising that JXN remains well positioned to achieve its 2023 capital return target of $500M at the midpoint, with $107M of dividends already paid and $117M of shares repurchased in H1'23.
The latter has contributed to its reduced share count of 84.75M by the latest quarter (-1.33M QoQ/ -4.42M YoY), naturally improving its FQ2'23 EPS to $3.34 (+6% QoQ/ +32.5% YoY) and annualized dividends per share to $2.48 (+12.7% YoY).
In addition, these metrics suggest the reduced likelihood for the JXN management to realize losses of $5.91B on its existing debt securities (+9.6% QoQ/ +21.1% YoY). This is especially since $30.11B, or the equivalent 60% of its portfolio comes with a long-term contractual maturity of between five to over twenty years.
Therefore, while the uncertain macroeconomic outlook has affected its overall annuity sales of $3.1B (inline QoQ/ -25% YoY), we are not overly concerned.
This is because JXN has strategically introduced a new line of Registered Index-Linked Annuity [RILA] products, with the segment boasting robust demand with sales of $541M (+1.5% QoQ/ +10.4% YoY) by the latest quarter. Sales have also accelerated in July 2023, based on the management's commentary in the recent earnings call.
This is compared to the stagnant variable annuity products (inline QoQ/ -33% YoY) and fixed annuity products (-13.5% QoQ/ +19.7% YoY).
These developments have naturally contributed to JXN's stable fee income/premiums of $1.91 (+1.5% QoQ/ -1% YoY) and net investment income of $435M (inline QoQ/+20.4% YoY) in FQ2'23.
The insurance segment's estimated Risk-Based Capital [RBC] ratio has also expanded QoQ while remaining within its target range of 425-500% and being way above the regulators' requirement of 200% .
As a result of the highly competent management team, JXN's annuity headwind is only temporal, with things likely to normalize once the consumer demand for treasury yields and money market funds moderate, depending on when the Fed pivots.
Investors Must Still Balance JXN's Risk & Reward Ratio
Naturally, JXN investors must be aware that moderate volatility may occur in its hedging process as the Fed pivots toward a normalized 2% inflation rate. This may potentially present a volatile performance, similar to its current situation.
For now, the market analysts have already priced in a rate freeze in the upcoming FOMC meeting on September 20, 2023, with Morningstar expecting a Fed pivot from February 2024 onwards.
This also coincides with the JXN management's cautious commentary in the recent earnings call, since its higher profitability is partly attributed to the "higher interest rates."
This means that when interest rates moderate, investors may expect the net hedging result to be negative, temporarily pulling down its GAAP net income profitability.
Therefore, while the management has already demonstrated its proof of concept after the demerger in September 2021 and a few years of uncertain macroeconomic environment, the unfavorable optics may trigger moderate headwinds in its stock valuations and prices in the intermediate term.
However, we maintain our belief that this pain may be temporal, as JXN navigates one of the worst market conditions, with the stock likely to break out once consumer and market sentiment normalizes.
The improved equity market conditions may allow its medium/ long-term hedging to play out more predictably while reducing the annuity company's volatility assumptions and risk margin.
The reduced market risk benefit losses, which have been elevated at -$2.74B (-279.5% YoY) in H1'23, may also moderate from henceforth, well-balancing the impact of the negative hedging results.
These developments suggest that the JXN stock is only suitable for investors with higher risk tolerance and patient investing trajectory, who are willing to wait for the push and pull factors to play out over the next few quarters.
So, Is JXN Stock A Buy , Sell, or Hold?
JXN 1Y EV/Revenue and P/E Valuations
S&P Capital IQ
For now, JXN trades at NTM EV/ Revenues of 1.34x and NTM P/E of 2.46x, higher compared to its 2Y mean of 0.71x and 1.97x, respectively. Then again, if we are to compare against the Diversified Insurance sector median P/E of 7.48x, it appears that JXN is still trading very attractively.
Consensus Forward Estimates
TIKR Terminal
These valuations do not appear to be overly lofty as well, since the consensus expects JXN to grow its adj EPS to $18.23 by FY2025, expanding at an impressive CAGR of +16.81% from the annualized FQ2'23 EPS of $13.36. This is on top of the robust Free Cash Flow, sustaining its shareholder returns.
These numbers coincide with Powell's guidance of " a return to 2% inflation by 2025 ," with the equity market conditions likely to be stabilized by then, which is also why we will be referring to the consensus FY2025 adj EPS estimates for our price target.
Combined with its NTM P/E valuation, it appears that JXN still has a decent upside potential of +15.7% from current levels to our intermediate-term price target of $44.84.
Furthermore, investors must not forget that the stock offers an expanded forward dividend yield of 6.60% at these levels, compared to its historical average of 4.45% and sector median of 3.91%.
Most importantly, we have estimated JXN's adj Book Value per share of $112.73, based on its Adjusted Book Value Attributable to Common Shareholders of $9.55B (-2.1% YoY) and its share count of 84.75M (-4.9% YoY) in FQ2'23.
These factors suggest that the stock is undervalued, based on the current stock price of $37.56, implying that its upside potential may be further boosted assuming an upwards rerating nearer to its peers.
JXN 2Y Stock Price
TradingView
For now, thanks to the recovering market sentiments and FQ2'23 outperformance, the JXN stock has successfully rebounded from the May 2023 support levels to retest its previous resistance levels of $39.
Despite so, we maintain our Buy rating on JXN, due to the great combination of dividend income and upside potential for opportunistic investors.
Interested investors may still add here depending on their portfolio allocations, as long-term investors dollar cost average accordingly.
For further details see:
Jackson Financial: Still A Potential Outperformer, As Volatility Assumptions Moderate