Since the beginning of the year, the Financial sector has lagged the rest of the market; as measured by the SPDR Financial Select Sector Fund (XLF), as of this writing it is down about 10% from its late January highs, and while the broad market appears to be recovering some bullish momentum this week, financial stocks remain mostly lower, constrained by the downward trend they’ve been following for the last six months. While interest rates have been rising for the last year or so, those gradual increases have kept rates near historically low levels, a fact that puts pressure on a variety of asset management offerings from savings accounts to certificates of deposit, bonds, and interest-bearing insurance products like annuities. I believe that fact has played a role in the sector’s underperformance. Insurance companies have also suffered not only from narrow margins resulting from low interest rates, but also from tepid revenues; that is a trend that could change, but is mostly expected to do so gradually.
The best opportunities in the Financial sector for investors, I think come from companies that can offer a balanced mix of products between asset management (including investment, savings and retirement) services and insurance services. Principal Financial Group (PFG) is a good example of one of those kinds of companies. The other fact is that a lot of stocks, like PFG in the Insurance industry have really been beaten down over the last six months, far more than the -10% I referred to at the beginning of this post. PFG, for example is down about 38% from its late January high, and that is a level that I think is starting to offer a pretty nice value proposition. Let’s take a more detailed look.
Fundamental and Value Profile
Principal Financial Group, Inc. is an investment management company. The Company offers a range of financial products and services, including retirement, asset management and insurance. Its segments include Retirement and Income Solutions; Principal Global Investors, Principal International; U.S. Insurance Solutions, and Corporate. The Company offers a portfolio of products and services for retirement savings and retirement income. The Company’s Principal Global Investors segment manages assets for investors around the world. The Company offers pension accumulation products and services, mutual funds, asset management, income annuities and life insurance accumulation products. The Company’s U.S. Insurance Solutions segment provides group and individual insurance solutions. It focuses on small and medium-sized businesses, providing a range of retirement and employee benefit solutions, and individual insurance solutions to meet the needs of the business owners and their employees. PFG has a current market cap of $15.7 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased about 10%, while sales decreased almost 6%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. The company’s Net Income versus Revenue was almost 14% in the last quarter, which indicates their margins are pretty healthy.
- Free Cash Flow: PFG’s Free Cash Flow is strong, at about $4.2 billion. This number has improved from a little under $3.5 billion a year ago.
- Debt to Equity: PFG has a debt/equity ratio of .26, which is conservative. The company has more than $4.9 billion in cash and liquid assets, which means they they have plenty of liquidity, against only about $3.2 billion in total long-term debt. Cash and liquid assets have improved over the past year from about $3.3 billion.
- Dividend: PFG pays an annual dividend of $2.08 per share, which at its current price translates to a dividend yield of about 3.8%.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for PFG is $42.79 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.27. The average for the Insurance industry is 1.2, while the historical average for PFG is 1.54. That might not sound like much of a discount, but it actually indicates the stock is a little more than 17% below the $66 level that a rally to par with its historical average would provide. That’s pretty attractive and offers a nice opportunity from a value-oriented perspective if the Financial sector comes back into favor as I’ve seen some analysts suggest should happen soon. If the stock’s downward trend continues, that proposition is only likely to improve.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line on the chart highlights the stock’s downward trend since January, and also provides the range needed to calculate the Fibonacci retracement lines shown on the right side of the chart. The stock’s gradual, but consistent stair-step pattern since February is a good indication of the downward trend’s strength. It’s also pretty easy to the stock’s recent bullish strength as it has rebounded from a trend low at around $52 per share to its current price level. The downward trend will remain in place until and only if the stock can break the $61 level marked by the 38.2% retracement line. A push above that point would likely mark and important reversal point. If the stock breaks below its current support around $52, its next most likely support level would be around $49; continued bearish momentum beyond that point could push the stock as low as $45.
- Near-term Keys: If the stock’s current bullish momentum holds, and the stock can break above immediate resistance around $56, the stock should have little trouble rallying near to $61 per share; that could be a decent opportunity for a bullish short-term trade by buying the stock outright or using call options. A drop below $52 could act as a good signal for a bearish trade using put options or by shorting the stock.