Is the Bullish Sentiment on Prudential Public Justified?

Prudential Public's price surge today seems to be confirming the bullish analyst outlook on the stock. Ending the day at $26.38, PUK has posted 4.1% gains, pushing the valuation of the stock even higher. Might the stock be overvalued, despite its strong buy rating?

The first step in determining whether a stock is overvalued is to check its price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's tangible assets minus its liabilities -- you can also think of it as the company's liquidation value.

Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Prudential Public is 2.2, compared to its sector average of 1.95 and the S&P 500's average P/B of 2.95.

Modernly, the most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 26.38 divided by either its trailing or forward earnings, which for Prudential Public are $0.93 and $3.73 respectively. Based on these values, the company's trailing P/E ratio is 28.4 and its forward P/E ratio is 7.1. By way of comparison, the average P/E ratio of the Financial Services sector is 13.34 and the average P/E ratio of the S&P 500 is 15.97.

If a company is overvalued in terms of its earnings, we also need to check if it has the ability to meet its financial obligations. One way to check this is via the so called Quick Ratio or Acid Test, which is the sum of its current assets, inventory, and prepaid expenses divided by its current liabilities. Prudential Public's Quick ratio is 0.673, which indicates that that it does not have the liquidity necessary to meet its current liabilities.

Investors are undoubtedly attracted by Prudential Public's dividend of $0.7%. But can the company keep up these payments? Dividends are paid out from levered free cash flow, which is the money left over after the company has accounted for all expenses and income -- including those unrelated to its core business. In Prudential Public's case, the cash flows are negative which calls into question the firm's ability to sustain its dividends.

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2021-12-31 -145,000,000.0 -36,000,000.0 -181,000,000.0 -109.48
2020-12-31 1,966,000,000.0 -57,000,000.0 1,909,000,000.0 135.54
2019-12-31 -5,308,000,000.0 -64,000,000.0 -5,372,000,000.0 -266.52
2018-12-31 3,360,000,000.0 -134,000,000.0 3,226,000,000.0 n/a

Shares of Prudential Public appear to be overvalued at today's prices — despite the positive outlook from analysts. But sometimes stocks with inflated valuations turn out to be strong performances for years, and even decades, such as Amazon. So be sure to do your own due diligence if you are interested in taking a long position in PUK.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.