2023-05-31 00:54:04 ET
Summary
- Principal Financial Group is a hold on valuation and technical grounds, with its forward P/E near its 5-year average and at a premium to the sector median.
- PFG's earnings are expected to be flat this year before recovering strongly in 2024 and 2025, with dividends continuing to rise.
- PFG stock has lost nearly one-third of its market value since late 2022, with mixed technical signs and a fair valuation.
The insurance industry had been an outperforming niche during value’s relative run from late 2021 through early 2023. The SPDR S&P Insurance ETF ( KIE ) notched highs in the first quarter of this year before the SVB and domestic regional banking debacle. On a relative basis, though, KIE is at its lowest level since last summer. I see shares of Principal Financial Group ( PFG ) as a hold on valuation and technically.
Insurance Industry Stocks Losing Relative Ground
According to Bank of America Global Research, PFG operates in four main areas: Retirement & Income Solutions (RIS), Asset Management ((PGI)), International, and U.S. Insurance. RIS delivers full-service accumulation, pension products, annuities, mutual funds, and other services to individuals and small-to-medium-sized businesses. PGI is a global asset manager. U.S. Insurance provides individual life and disability insurance and group life insurance. Lastly, the International business sells products in Latin America and Asia.
The Iowa-based $16.6 billion market cap Life and Health Insurance industry company within the Financials sector trades at a low 4.1 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.8% dividend yield, according to The Wall Street Journal.
Back in April, PFG reported a modest earnings miss , driven by a substantial miss in its life insurance business. Higher claims were experienced while broader fund flows were on the soft side. With ongoing volatility and uncertainty in the commercial real estate market, the firm disclosed more information on its CRE portfolio. The management team boasted about strong debt service coverage and modest loan-to-value metrics across its commercial mortgage holdings. Shares drifted lower post-earnings, but there were no major surprises in the report.
On valuation , analysts at BofA see earnings about flat this year before per-share profit growth recovers to a strong pace in 2024 and ‘25. The Bloomberg consensus forecast is even more optimistic compared with BofA’s projections. Dividends, meanwhile, are seen as continuing to rise despite the banking and duration dramas of the past few months. With low-teens earnings multiples in the out year, shares appear attractive today.
PFG: Earnings, Valuation, Dividend Yield Forecasts
But digging deeper into the valuation, the forward P/E is just near PFG’s 5-year average and actually at a premium to the sector median. Also, the company’s price-to-book ratio is stretched on a relative basis, too. Overall, I see the valuation as lackluster and still not a bargain. If the firm achieves $7 of ‘24 EPS, then a $70 share price appears fair. Thus, I reiterate my hold rating.
PFG: Near Fair Value Versus Its Long-Term Trend
Looking ahead, corporate event data from Wall Street Horizon show a confirmed Q2 2023 earnings date of Thursday, July 27 AMC. Shares trade ex-dividend on Wednesday, May 31.
Corporate Event Risk Calendar
The Options Angle
Looking into the upcoming earnings report, data from Option Research & Technology Services (ORATS) shows a consensus EPS forecast of $1.66 in the upcoming quarterly report. That would be about unchanged from $1.65 earned in the same quarter a year ago. PFG has traded higher post-earnings in four of the past 5 reports. The April report featured an EPS miss but the stock did not react poorly – perhaps much of the bad news was priced in following the regional banking crisis during March.
For the July report, PFG has higher implied volatility versus pre-SVB, now above 30%, so the at-the-money straddle expiring soonest after the Q2 report reveals just a high 6.2% swing priced in. I am inclined to sell that premium considering the previous two earnings-related stock price moves have been nothing to write home about. Let’s spot some key strikes on the chart for a directional play. Long-term investors can also sell options to boost their income yield from shares.
PFG: Expensive Options Heading Into Q2 Earnings
The Technical Take
PFG has lost nearly one-third of its market value from the late 2022 peak. Notice in the chart below that shares are nearing critical support in the $58 to $61 zone. Will the stock get there, though? I spotted bullish RSI momentum divergence when comparing the lower low on shares in May versus the March low while the RSI indicator at the top of the chart shows a higher low. Not all signs are that of hope, however.
The long-term 200-day moving average has turned flat and will likely creep lower in the weeks ahead, which indicates that the bears are gaining control. What’s more, there is a heavy amount of volume by price up to the mid-$70s, so that could be tough sledding for the bulls. Overall, like the valuation, I see mixed signs.
PFG: Long-Term Support Near $60, Resistance $80
The Bottom Line
I reiterate my hold rating on PFG stock. The valuation is fair in light of new information while the chart is likewise unexciting.
For further details see:
Principal Financial: Lowered Expectations, Shares Near Fair Value