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Prudential Kept at Neutral

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We reiterate our ‘Neutral’ recommendation on the shares of Prudential Financial Inc. (PRU - Free Report) following its third-quarter earnings release, which reflected a massive improvement of 82% in earnings on a year-over-year basis. Results, however, lagged the Zacks Consensus Estimate.

Despite its failure to meet the estimates in the current quarter, we remain upbeat about Prudential’s long-term performance. It has been focusing on its underlying businesses by making significant acquisitions and shedding non-core businesses. The acquisition of The Hartford Financial’s life Insurance business will further strengthen its Individual Life business.

Prudential’s Retirement business is set to benefit from the recently made two big pension risk transfer transactions. The company is aggressively seeking to build its leadership position in the pension risk transfer market, which presents a great earning potential.

Prudential also has a strong international presence that provides it with better organic growth opportunities than its peers. The company has a strong footprint in Japan, with operations in the region for over thirty years. It is also expanding in China, Korea and other Asian countries.  Moreover, the changing demography of the U.S. population bodes well for the company.

Our recommendation is based on a cautious near-term outlook on Prudential’s exposure to products such as annuities and universal life, which guarantees minimum return, will keep its capital under strain. The company’s results suffered due to the requirement of additional reserve accretion when the low interest rate increases the value of these liabilities.  We expect the trend to continue in the wake of the continuing low interest rate cycle.

Moreover, Prudential’s investment portfolio remains a source of threat due to its high exposure to commercial real estate, through Commercial Mortgage Loans and Commercial Mortgage Backed Securities, hedge funds and partnerships. However, we are positive about Prudential’s effective capital management.

A right mix of business and strong fundamentals have helped Prudential garner market share from weak competitors.

Prudential’s stock retains a Zacks #3 Rank, which translates into a short-term Hold rating. Peers Metlife Inc. (MET - Free Report) and American International Group Inc. (AIG - Free Report) both also retain Zacks #3 Rank and a long term ‘Neutral’ recommendation.

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