Why You Should Hold On To Principal Financial Stock

Principal Financial Group Inc. PFG remains well-poised for growth, banking on strong segmental performance, growing assets under management and a solid capital position. This Zacks Rank #2 (Buy) investment manager bears immense potential owing to a few good growth drivers.

Growth Projections: The Zacks Consensus Estimate for 2018 earnings per share is pegged at $5.61 on revenues of $13.84. The consensus mark reflects a year-over-year increase of 7.5% for the bottom line and nearly 1% for the top line.

The expected long-term earnings growth rate is pegged at 10%.

Positive Earnings Surprise History: Principal Financial has surpassed the Zacks Consensus Estimate in three of the last four quarters with an average beat of 6.40%.

The company is expected to report fourth-quarter results in the last week of January. Our proven model shows that Principal Financial is likely to beat estimates this quarter based on an ideal combination of the two strong ingredients: a Zacks Rank of 2, which increases the predictive power of ESP and an Earnings ESP of +0.98%, which makes us confident of a likely positive earnings surprise.

You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Upbeat Guidance: Principal International is expected to deliver net revenue growth between 11% and 14% in 2018. While solid sales and retention as well as an employment recovery are likely to drive Specialty Benefits premiums and fees by 7-9%, the loss ratio is estimated at 62-68% on improved underwriting. Premiums and fees at Individual Life are projected to increase in the band of 3-6%.

Price Performance: Shares of Principal Financial have rallied 20.2% in a year's time, substantially underperforming the industry's 30% surge. Nonetheless, the shares have outperformed the S&P 500 index's 19% registered gain.

Underpriced: Looking at the company's price-to-book ratio — the best multiple for valuing investment managers because of large variations in their earnings results from one quarter to the next — shares are underpriced at the current level. The company has a trailing 12-month P/B ratio of 1.68, falling significantly below the industry average of 2.54. In fact undervalued shares with growth prospects are the best investment bets. Principal Financial carries a Value Score of A.  

Growth Drivers in Place

Principal Financial's businesses across most lines and segments are poised to deliver solid numbers. The company estimates net revenue growth in the range of 2-5% at Retirement and Income Solutions — Fees and 5-10% at Retirement and Income Solutions — Spread. Revenues are estimated to increase 4-8% at Principal Global Investors.

Principal Financial's AUM shows a steadily rising trend, driven by better results at three asset management and asset accumulation segments. We believe this AUM growth to be supported by the company's extensive distribution footprint, best-in-class solutions and an operational discipline. Principal Financial envisions $1 trillion in assets under management on the strength of various growth drivers and its strong leadership position.

The gradually improving rate environment will continue to drive better investment results.

A robust financial position aids the company to return value to shareholders through dividend hikes as well as pursue growth initiatives. While the company targets capital deployment between $0.9 and $1.3 billion in 2018, it estimates risk-based capital ratio to return to the targeted range of 415-425% over the next several quarters.

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