Prudential (LSE: PRU), the multinational insurance and financial services giant, has had a rough go of it in 2024. As the FTSE 100’s second-worst performer year-to-date, with the shares down a staggering 33.7%, many investors might be tempted to steer clear. However, as seasoned Fools know, sometimes the biggest losers can become tomorrow’s winners. So, is the company worth a closer look? Let’s dive in.
A bad year
First, let’s address the elephant in the room – that eye-watering decline in the share price. Prudential has faced a perfect storm of challenges. These include economic challenges in its key Asian markets, regulatory changes, and broader market volatility. But for contrarian investors, this could spell opportunity.
One of the first things that catches my eye is the firm’s valuation. Trading at 61.4% below what a discounted cash flow (DCF) calculation estimates to be fair value, there’s a decent argument to be made that the market has overreacted. With a price-to-earnings (P/E) ratio of 25.3 times, it’s not exactly in bargain basement territory, but it’s worth noting that this figure is potentially inflated by this temporary earnings pressure.
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Lots to like
Speaking of growth, annual earnings are forecast to increase by a healthy 25.12% for the next five years. This is particularly impressive given the challenging macroeconomic environment and speaks to the company’s strong market position in Asia, where it derives the bulk of its business. The region’s growing middle class and increasing demand for insurance and financial products provide a long-term boost that shouldn’t be ignored.
Dividend hunters might be intrigued by a 2.5% yield. While far from the highest in the FTSE 100, it’s worth noting that the payout ratio stands at 66%, suggesting room for future growth if earnings can recover.
On financial health, the firm appears to be on solid ground. With a debt-to-equity ratio of 30.1%, the balance sheet looks robust enough to weather current storms.
Could it get worse?
Clearly, it’s not all rosy in the company. Profit margins have taken a decent hit, dropping from 13.1% last year to 8% in the most recent reporting period. This decline in profitability is certainly concerning and warrants close monitoring.
Another point of caution is the company’s exposure to market volatility and regulatory changes, particularly in China. As recent events have shown, these factors can have a significant impact on Prudential’s performance and share price.
So, is Prudential worth a closer look? For investors with a high risk tolerance and a long-term horizon, the answer might well be yes. The company’s strong market position in Asia, forecast earnings growth, and apparent undervaluation present an intriguing opportunity for those willing to weather potential short-term volatility.
However, more conservative investors might want to wait for signs of margin improvement and a return to more stable earnings.
Of course, in the world of investing, today’s laggards can become tomorrow’s leaders. After all, as Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful”. The market certainly seems fearful of Prudential right now – but could that spell opportunity for Foolish investors? I’ll be adding it to my watchlist.
