Goldman Upgrades Prudential To Buy, Adds To 'Conviction' List

Goldman Sachs upgraded Prudential Financial Inc PRU from Neutral to a Buy rating and added to its ‘Conviction' List. Analysts Michael Kovac and Rosalie Frazier cited four key factors for the revision in rating. They have retained the target price of $93 on the stock, implying more than 15 percent upside potentials.

The first factor is the upward revision in EPS estimates for the first time in a year after revising downward in the same period. As a result, the brokerage's EPS estimates came in more than the Street expectations fueled by strong equity markets, lower headwinds from forex and decreasing pressure from rate. Goldman expects EPS to grow 10 percent in 2017.

The second is that Prudential reduced its key overhand and boosted its capital deployment by lifting its share repurchase program by $1 billion besides 20 percent hike in dividend rate.

The third is differentiated franchise. The analyst thinks the company is undervalued and has high-quality asset management pointing out 10 percent AUM uptick after the year 2009. Their operation in Japan, which contributes 45 percent of income, is well-placed. Therefore, analysts aren't worried about the rates as Prudential is fully differentiated from its rivals, which are sensitive to rates.

The fourth factor is operation on increased rates. The brokerage viewed, "Our work on relative valuation vs. interest rates implies that, despite the recent run, PRU's P/E could expand >1x if the UST10Y rises to 2%. PRU is among the most liquid insurers and today trades at half the S&P's multiple."