Principal Finc'l Fights Headwinds

Principal Financial Group’s (PFG - Analyst Report) operating earnings of $0.97 per diluted share were slightly below our expectations.

Losses in the spread and securitization business, reflecting volatile conditions in the global credit markets, deteriorated operating earnings in the US Asset accumulation segment and the Global asset management segment, but was partially offset by improvements in the operating results of International Asset Management and Accumulation segment and the Life and Health segment.

Additionally, the company incurred losses from impaired Alt-A and subprime mortgage investments. Though the company has a strong franchise in the pension sector, we expect growth to moderate because of the current economic crisis and the commercial mortgage-backed securitization market. Hence, we reiterate our Hold recommendation.

Following a review of the 2Q08 results and revised company guidance we have lowered our FY08 earnings expectation to $3.85 per share from $4.00 per share and our FY09 earnings expectation to $4.50 per share from $4.60 per share. The shares of PFG trade at 12.7x our 2008E EPS and 1.85x reported 2Q08 book value of $26.45 per share, a substantial premium to its peers.

Although the company’s ROE has the potential to expand, in our opinion, we think general market conditions will continue to create headwinds for this company and the valuation for its shares. Our new six-month price target of $52.00 per share, down from $55.70 per share, incorporates a price-to-book value multiple of 1.75x to our estimated book value of $28.10 per share at December 31, 2008.

Read the full analyst report on PFG

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