Retirement And Global Asset Management Expansion Will Secure Future Strength

Key Takeaways

• Strategic focus on SMBs and global asset management aims to capitalize on retirement growth, enhancing future revenue potential.
  
• Cost management aligns expenses with revenue, improving net margins and resilience amid market volatility.
  
• Market volatility and competitive pressures could reduce revenue and compress net margins across various business segments due to changes in client behavior and pricing adjustments.

Catalysts

Provides retirement, asset management, and insurance products and services to businesses, individuals, and institutional clients worldwide.

• Principal Financial Group is positioning itself to capitalize on growth opportunities in the retirement ecosystem, focusing on SMBs and Global Asset Management. This strategy could drive future revenue growth as these markets expand.
  
• The company has been aligning expenses with revenue through disciplined cost management, which is likely to positively impact net margins and earnings even during volatile market conditions.
  
• Principal is leveraging its diversified and resilient business model, which includes high-growth areas like high-yield, preferred securities, real estate, and international equities. Positive developments in these asset classes could enhance future AUM and revenue streams.
  
• The company's strategic expansion in international markets, particularly seen in strong local investment management flows in Mexico and Southeast Asia, points to potential future revenue growth from increased global reach.
  
• By focusing on higher-quality and higher-fee mandates, particularly in asset management, Principal stands to improve its revenue rate and margins across its portfolio, thereby contributing to future earnings growth.

Principal Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Principal Financial Group's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $10.13) by about April 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, down from 15.4x today. This future PE is lower than the current PE for the US Insurance industry at 14.1x.
• Analysts expect the number of shares outstanding to decline by 4.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Principal Financial Group Future Earnings Per Share Growth

Risks

• The market environment is highly dynamic and unpredictable, with policy shifts and uncertainties contributing to heightened volatility, impacting fee revenue in retirement and asset management. This could affect revenue and earnings in the future.
  
• Despite positive quarterly earnings, there was a net cash outflow of $4 billion, largely due to low-fee institutional fixed income withdrawals. Continued challenges with inflows versus outflows could pressure run rate revenue and net margins.
  
• The recent market volatility may weaken client behavior in asset management, leading to more risk-off allocations, which could decrease revenue and impact net margins if persistent.
  
• While mortality in the life insurance business remains within expectations over longer periods, there was a noted increase in single, severe claims this quarter, which may indicate potential variability in future earnings and could impact net margins.
  
• Persistent competitive pressures and pricing adjustments in the dental insurance segment of Specialty Benefits could constrain growth in premium and fees, impacting revenue and potentially compressing net margins over time.

Valuation

• The analysts have a consensus price target of $80.917 for Principal Financial Group 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 $99.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.0 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $74.59, the analyst price target of $80.92 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.