2023-11-16 13:00:00 ET
Summary
- Jackson Financial Inc. stock has continued outperforming its financial sector peers since May 2023, corroborating my previous thesis that it has bottomed out decisively.
- The company's operating performance is expected to improve through 2024, supporting its "A+" valuation grade. However, it's time to reassess whether the recent surge could have priced in the optimism.
- Jackson Financial's Q3 results demonstrated improved earnings and strong sales momentum. Its solid capital position has strengthened investors' confidence in its capital return framework.
- I consider my bullish thesis on JXN to have played out accordingly. With JXN's recent surge reaching uncomfortable levels, I believe it's time to brace for impact.
I last updated Jackson Financial Inc. ( JXN ) investors in late August, urging them to capitalize on its valuation dislocation to add more shares. As such, I'm not surprised that JXN has continued to outperform its financial sector ( XLF ) peers since bottoming out in early May 2023.
Bearish investors were skeptical about JXN's best-in-class "A+" valuation grade as they assessed whether they needed to be worried about a potential value trap. However, I presented that the market has likely reflected peak pessimism , as Jackson Financial's operating performance is expected to improve through 2024.
Investors who ignored the market pessimism and followed through with JXN's dip-buying sentiments have been rewarded. With the recent surge, JXN notched a 1Y total return of nearly 30%, outperforming the S&P 500 ( SPX ) ( SPY ). Keen investors should recall that it didn't look constructive in early July, even though I stressed that JXN was at peak pessimistic levels.
Jackson Financial's third-quarter or FQ3 earnings release corroborated the market's confidence that the worst is likely over. However, investors who sat on the sidelines and wanted to wait for the good news to arrive first have missed participating in highly attractive risk/reward levels. In other words, by the time you read this update, JXN's price action and risk/reward are no longer as attractive.
The annuities-focused company delivered an adjusted operating EPS of 3.80 in Q3, up QoQ from Q2's $3.34. It was also above Q1's adjusted operating EPS of $3.15, corroborating dip-buyers' conviction that JXN's operating performance has bottomed out decisively.
In addition, the company reported strong sales momentum in retail annuities, up 6% QoQ. It also saw " consistent " variable annuity sales and net flows in Q3, while fixed and fixed index annuities experienced "relatively modest" momentum last quarter. In other words, management's commentary suggests things didn't head back to the doldrums the company saw in Q1, auguring well for further improvement in 2024.
Furthermore, the company's risk profile has remained robust, with its risk-based capital ratio exceeding its target range of 425% to 500% in Q3. Management accentuated that "maintaining a strong capital position is a priority for Jackson and its operating companies," providing investors more confidence about its robust capital position.
In addition, the company's effective capital allocation strategy returned more than $120M to shareholders through share repurchases and dividends in the third quarter. Jackson Financial stressed that it remains on track to meet its 2023 capital return target of $450M to $550M. Also, the company highlighted it intends to strengthen its liquidity further as it aims to retire $600M in senior debt in November.
With an improving operating performance and a robust capital framework, I believe pessimistic investors have been proved wrong. Furthermore, most of its investment portfolio (94%) is allocated to investment-grade securities. In addition, 9% of total invested assets are allocated to US Treasuries, bolstering the liquidity profile of Jackson Financial's portfolio.
As such, I believe the stunning collapse in the first half as the market de-rated JXN, given macroeconomic uncertainties and interest rate risks has reversed decisively.
The company's effective hedging strategies, solid annuities franchise, and robust capital position have helped Jackson Financial navigate these headwinds remarkably well.
Notwithstanding my optimism, I assessed that JXN's price action has moved well above its peak pessimistic zone. Although it's still assigned an "A+" valuation grade by Seeking Alpha Quant, I'm realistic about anticipating a significantly higher upward re-rating.
Jackson Financial operates in a highly regulated and competitive annuities business, and obtaining a sustainable competitive moat is very challenging. Also, JXN's market outperformance has likely captured much of its near- to medium-term upside, even though a further lift toward its February highs is still possible.
While its forward dividend yield of 5.8% is reasonable, most of its 1Y total return is based on its price-performance recovery. As such, I believe it's timely to be more cautious of JXN's upward surge as I move to the sidelines at the current levels. A steep pullback should help to improve the entry levels for investors who have yet to enter their positions.
Rating: Downgraded to Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Jackson Financial: Time To Brace For Impact (Rating Downgrade)