RGA Reinsurance And AllianceBernstein Stake Will Secure Core Stability

Key Takeaways

• The reinsurance transaction with RGA aims to stabilize earnings, allowing a stronger focus on core areas like Retirement and Wealth Management.
  
• Increased ownership in AllianceBernstein and expansion in private markets could drive revenue growth and shareholder value through better integration and higher margins.
  
• Elevated mortality claims and competitive pressures in annuity markets threaten earnings, while market volatility and global uncertainties pose risks to cash flow and revenue stability.

Catalysts

Together with its consolidated subsidiaries, operates as a diversified financial services company worldwide.

• The planned reinsurance transaction with RGA is expected to reduce exposure to mortality volatility, potentially stabilizing future earnings and enhancing focus on core growth engines like Retirement, Asset Management, and Wealth Management.
  
• Increased ownership in AllianceBernstein to 69% offers potential for better integration and synergies with Equitable Holdings, which could boost revenue and overall earnings by capturing more of AB's economics.
  
• Strong secular demand drivers in Retirement, Asset Management, and Wealth Management, evidenced by positive net flows, suggest potential for sustained revenue growth as more assets move from 401(k) plans to secure retirement solutions.
  
• The opportunity to deploy $2 billion of capital post-reinsurance transaction enhances financial flexibility, potentially enabling more aggressive share buybacks, debt reduction, or strategic investments, which could improve earnings per share and shareholder value.
  
• Expansion in private markets and increased efficiencies in advisor productivity points to higher margins and enhanced revenue streams, particularly from the Wealth Management business.

Equitable Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Equitable Holdings's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $9.36) by about May 2028, up from $1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.4 billion in earnings, and the most bearish expecting $1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, down from 12.7x today. This future PE is lower than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 6.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

Equitable Holdings Future Earnings Per Share Growth

Risks

• Elevated mortality claims in the individual life insurance block significantly impacted non-GAAP operating earnings this quarter, reducing earnings per share and highlighting the risk of future demographic or pandemic challenges, potentially affecting net margins.
  
• Competition in the registered index-linked annuity (RILA) market could lead to more aggressive pricing strategies by competitors, which may compress margins and affect future revenues in Equitable's Retirement business.
  
• Market volatility and declines in equity markets can negatively impact fee income from investment and retirement products, which may lead to lower overall earnings and revenue sensitivity to equity market changes.
  
• Equitable’s reliance on a combination of insurance and non-insurance cash flows, especially during periods of market stress, could pose a risk if there are sustained market declines, impacting cash flow predictability and availability for shareholder returns.
  
• Uncertainty in global markets, such as fluctuation in interest rates or credit spreads, could create challenges in investment performance and affect asset and wealth management income, pressuring net earnings and growth.

Valuation

• The analysts have a consensus price target of $62.6 for Equitable Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $77.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $17.6 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $50.15, the analyst price target of $62.6 is 19.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.