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We are maintaining our Neutral recommendation on the shares of Prudential Financial Inc. (PRU - Analyst Report), prior to the release of its third quarter earnings on November 7. The Zacks Consensus Estimate is currently pegged at $1.65 per share, translating into a year-over-year growth of 55%.

Prudential is the second-biggest U.S. life insurer and has a sizable business in the nation’s life insurance sector, with strong positions in high-margin businesses and a diversified portfolio. Although there was a drag on revenues in the recent past due to the volatile economic environment, the company has consistently recorded increased revenue over the past several quarters.

Prudential has a strong international presence that provides it with better organic growth opportunities than its peers. Prudential has a strong footprint in Japan, with operations in the region for over thirty years. It is also expanding in China to tap the fast-growing Chinese life insurance market that has expanded almost 30% a year, on average, over the past three decades. 

Prudential has been focusing closely on three areas – Asset Management, Annuities and International – and axed other allied businesses such as Health Care, Property and Casualty, Retail Brokerage, Investment Banking and Commodities. Management expects to generate ROE of 13%–14% by 2013 by disposing less profitable businesses that have diminished overall returns.

Our Neutral recommendation is based on our cautious near-term outlook on Prudential’s exposure to products, which guarantees minimum return like annuities and universal life, will keep capital under strain. A low interest rate environment will increase the value of these liabilities, which might lead to additional reserve accretion. Though the company has put hedging and risk management strategies in place, these might prove insufficient, thereby negatively affecting the operating results.

Moreover, Prudential’s investment portfolio remains a source of threat because of its high exposure to commercial real estate, through Commercial Mortgage Loans and Commercial Mortgage Backed Securities, hedge funds and partnerships. We, however, view positively Prudential’s effective capital management.

A right mix of business and strong fundamentals has helped Prudential garner market share from weak competitors. Prudential is poised to improve its earnings faster than its peers – Metlife Inc. MET">(MET) and American International Group Inc. (AIG - Analyst Report) – in the coming years.

Prudential’s stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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