Prudential’s (LSE: PRU) share price has fallen 16% from its 28 March 12-month high of £8.47.
In my view, this loss had little to do with company specifics. Instead, it was prompted by the run-up to and aftermath of the US’s 2 April tariffs announcement.
Consequently, it may be that now is a great time to buy a terrific stock at a fabulous price. But it might not be.
The answer depends on how much value the stock holds and whether it suits an individual’s portfolio requirements.
Relative valuations with its peers
Prudential currently trades at a price-to-earnings ratio of 10.4. This is bottom of its peer group of global insurance and investment firms, which averages 15.5. These companies comprise MetLife at 11.6, ManuLife at 13.9, Allianz at 14, and Aviva at 15.5.
So Prudential looks undervalued on this measure.
The same is true of its 1.4 price-to-book ratio compared to its competitors’ average of 1.8.
However, it is overvalued on the price-to-sales ratio, trading at 1.9 compared to its peer average of 1.
It is in cases of contrasting valuations like this where I find using future cash flows to be especially helpful. In Prudential’s case, the resultant discounted cash flow analysis shows the stock is 65% undervalued at its current £7.14 price.
Therefore, the fair value for the stock is in theory £20.40, although market vagaries could push it lower or higher.
In short, I think there is a huge amount of value remaining in Prudential shares.
Looking deeper into the business
Having established a baseline technical undervaluation, I then dive further into the business to see how that looks.
A longstanding risk for the firm is intense competition in the insurance and investment sector, in my view. This could squeeze its margins and reduce profits over time.
Shorter-term risks relate to a potential global economic recession that could cause customers to close their accounts with Prudential. The chance of such an economic contraction have increased from around 40% to about 60% according to various market sources.
That said, the firm’s 2024 results released on 20 March showed adjusted operating profit up 10% year on year to $3.129bn (£2.42bn).
For 2025, Prudential forecasts 10% growth in new business profit and basic earnings per share.
Consensus analysts’ projections are even more upbeat at 11.6% earnings growth every year to the end of 2027.
Will I buy the stock?
I have several other holdings in the same sector that I am very happy with. These are Phoenix Group Holdings, M&G, and Legal & General.
All three are forecast to see higher annual earnings growth than Prudential — Phoenix Group’s is 91.6%, M&G’s 42.4%, and Legal & General’s 28.8%.
And M&G is also slightly more undervalued than Prudential’s – at 67% below its fair value.
All three as well have much higher dividend yields than Prudential’s meagre 2.5%. M&G currently yields 11.6%, Phoenix Group 10.7% and Legal & General 9.9%.
Therefore, although Prudential shares look a bargain, they are not sufficiently compelling for me to buy.
