On Thursday, Morgan Stanley (NYSE:MS) downgraded Principal Financial Group (NASDAQ:PFG) stock, moving the rating from Equal-weight to Underweight and reducing the price target to $80 from $86.
The shift in rating comes as the financial services company, which has maintained dividend payments for 23 consecutive years according to InvestingPro data, faces scrutiny over its valuation and growth prospects.
The downgrade was prompted by concerns over the company's long-term outlook, which is believed to be under pressure due to slower growth in its Principal Global Investors (PGI) and Principal International (PI) sectors.
Additionally, there is an expectation of longer-term weakness in the Specialty Benefits division. According to the analyst, the consensus earnings per share (EPS) growth rate is overly optimistic, and Morgan Stanley's estimated EPS growth rate for 2025 is approximately 4% below the consensus.
Principal Financial Group is currently trading at around 10 times its projected 2025 earnings, compared to a peer average of 8.9 times. This discrepancy suggests that the market may be overvaluing the company when compared to its competitors.
According to InvestingPro's Fair Value analysis, the stock appears to be trading above its Fair Value, with a price-to-book ratio of 1.73x and an overall Financial Health score rated as "FAIR."
The analyst's statement indicates that the potential challenges facing Principal Financial Group are not fully accounted for in the company's current investment thesis as it heads towards 2025.
The new price target of $80 reflects the use of the current multiple and implies a roughly 6% downside to the company's share price. With analyst targets ranging from $77 to $99 and a consensus recommendation of 2.92, the downgrade and revised price target suggest that investors should be cautious about the company's ability to meet growth expectations in the coming years.
For deeper insights into PFG's valuation and growth prospects, investors can access the comprehensive Pro Research Report available on InvestingPro, which covers over 1,400 US stocks with detailed analysis and actionable intelligence.
In other recent news, Principal Financial Group reported steady growth in its Q3 2024 earnings, with non-GAAP operating earnings increasing by 12% to $412 million compared to the same period last year.
The company's total assets under management (AUM) also rose by 6% to $741 billion, accompanied by a 5% increase in net revenue. Analysts from Principal Financial Group project a full-year EPS growth of 9% to 12%.
Piper Sandler retained its Neutral rating on Principal Financial Group, noting the company's growth strategies and its ability to maintain long-term return on equity (ROE) targets despite various challenges. However, the firm expressed caution regarding the consensus expectations for 2025, suggesting that the anticipated ROE of over 16% might be overly optimistic.
RBC Capital raised its target for Principal Financial to $91, up from the previous $87, maintaining its Sector Perform rating. The adjustment followed Principal Financial's Investor Day, which included presentations about various aspects of its business.
Principal Financial Group also announced the appointment of Deanna Strable as its new CEO, effective from January 7, 2025. Strable, a veteran with a 35-year career at Principal, will succeed Dan Houston, who will continue as the executive chair of the Board. These recent developments highlight the ongoing evolution and financial performance of Principal Financial Group.
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