Retirement Solutions Focus Will Strengthen Future Market Position

Key Takeaways

• Strong emphasis on enhancing retirement solutions and asset management could drive revenue growth and expand margins.
  
• Capital management strategies like share buybacks and dividend increases aim to improve EPS and shareholder returns.
  
• Competitive pressures, currency risks, and declining investment income threaten revenue growth, while elevated interest rates impact real estate earnings.

Catalysts

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

• Principal Financial Group is focused on enhancing its retirement solutions business, capitalizing on favorable market conditions and a broad integrated suite that drives revenue growth and expands margins.
  
• The firm is experiencing significant momentum in new retirement plan sales, with a strong pipeline across all segments, which could lead to increased revenue and earnings in 2025.
  
• Principal Asset Management is seeing increased RFP activity, indicating future growth opportunities fueled by heightened demand from global retail and institutional investors, potentially impacting net margins positively.
  
• Principal International is showing robust performance and is positioned for growth due to strong net cash flows, favorable market conditions, and FX tailwinds, which should drive revenue and earnings.
  
• Capital management decisions, including share buybacks and dividend increases, are expected to contribute to higher EPS, indicating potential earnings growth and improved shareholder returns.

Principal Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Principal Financial Group's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.5% today to 11.4% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $9.89) by about December 2027, up from $-206.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2027 earnings, up from -86.1x today. This future PE is lower than the current PE for the US Insurance industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 2.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.22%, as per the Simply Wall St company report.

Principal Financial Group Future Earnings Per Share Growth

Risks

• Outflows in PGI (Principal Global Investors) related to lower fee and yield products, as well as institutional client rebalancing, could negatively impact revenue growth.
  
• High competitive pressures in dental products could affect pricing strategies, potentially impacting revenues and margins in the Specialty Benefits business.
  
• The impacts of foreign currency translation pose a risk to revenues and earnings, particularly in Principal International's segment.
  
• The decrease in variable investment income, largely driven by negative private equity returns, poses a risk to investment-related earnings.
  
• Elevated interest rates have affected transactional activity and money flow in the real estate sector, which could impact earnings from new investments and alternative asset returns.
  

Valuation

• The analysts have a consensus price target of $88.67 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 $75.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.6 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of $77.54, the analyst's price target of $88.67 is 12.5% 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.