Tactical Acquisitions And Market Diversification Poised To Propel Growth In Emerging Sectors

Key Takeaways

• Principal Financial Group's strategy focusing on high-growth markets and sectors like SMB, along with strategic acquisitions like Ascensus' ESOP business, aims to boost revenue, margins, and market share.
  
• Investments in private credit and infrastructure, alongside a commitment to shareholder returns through dividends and repurchases, reflect confidence in long-term growth and efforts to diversify income sources.
  
• Heavy reliance on diversified asset management and foreign currency translation headwinds, coupled with participant withdrawals and commercial loan risks, may significantly impact future earnings.

Catalysts

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

• Principal Financial Group's disciplined execution of strategy and focus on higher growth markets are expected to drive future growth by improving net revenue and margins, particularly in the SMB (small to midsized businesses) sector.
  
• The company's acquisition of Ascensus' ESOP business, aimed at solidifying its position as the top ESOP provider in the U.S., is expected to enhance product offerings and customer value, thereby increasing earnings through expanded market share and diversified revenue streams.
  
• Principal's ongoing capital return to shareholders, through share repurchases and dividend increases, aligns with achieving a targeted 40% dividend payout ratio, potentially improving EPS as a result of reduced share count and demonstrating confidence in future growth.
  
• Investment in new capabilities such as the Principal Private Credit Fund and private infrastructure debt, aligning with trends towards private market investments, could lead to increased AUM (assets under management) and fee income, boosting revenue and margins in the asset management segment.
  
• The company's focus on pension risk transfer (PRT) sales, with a disciplined approach to growth and returns, and leveraging its ESOP and defined benefit plan capabilities for new business, is expected to enhance revenue growth and profitability in the retirement solutions market.

Assumptions

• Analysts are assuming Principal Financial Group's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $9.61) by about August 2027, up from $1.3 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 10.0x on those 2027 earnings, down from 13.4x today. This future PE is lower than the current PE for the US Insurance industry at 13.4x.
• Analysts expect the number of shares outstanding to decline by 4.19% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.05%, as per the Simply Wall St company report.

Risks

• The heavy reliance on diversified asset management and the reported negative net cash flows in this sector due to significant redemptions could potentially impact future earnings due to volatile investment income and possible reduction in management fees.
  
• Foreign currency translation headwinds, notably a $9 billion impact in the quarter and $20 billion over the last 12 months, could adversely affect net revenue and earnings, especially if the U.S. dollar continues to strengthen against other currencies.
  
• Elevated participant withdrawals, attributed partially to favorable markets, might lead to reduced assets under management in retirement plans, potentially diminishing future management fee income.
  
• The exposure to challenges in the commercial mortgage loan portfolio, specifically office loan maturities, might pose a risk to earnings if economic conditions deteriorate or resolvability of these loans comes under pressure.
  
• Seasonality of sales, particularly in Principal International due to the pattern of sales in markets like Brazil, coupled with the reliance on the second half of the year for strong net cash flows, introduces risk to achieving projected annual revenue and earnings growth, especially if expected market conditions do not materialize.

Valuation

• The analysts have a consensus price target of $85.92 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 $70.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.4 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of $73.11, the analyst's price target of $85.92 is 14.9% 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.