On Wednesday, Wells Fargo (NYSE:WFC) issued a downgrade for Principal Financial Group (NASDAQ:PFG), changing its rating from Equal Weight to Underweight. Accompanying the downgrade, the firm also reduced its price target on the stock to $75.00 from the previous $84.00.
The stock, currently trading at $80.74 with a market capitalization of $18.47 billion, appears overvalued according to InvestingPro Fair Value analysis. The revision reflects concerns over anticipated challenges within the company's Retirement and Income Solutions (RIS) and Principal Global Investors (PGI) segments.
The analyst from Wells Fargo highlighted that persistent pressures on organic growth in RIS and PGI are likely to continue, which could negatively impact fee income. This includes issues such as fee compression and weaker performance fees. With annual revenue of $14.07 billion and a FAIR Financial Health Score from InvestingPro, the company faces challenges despite maintaining a solid 3.62% dividend yield.
In comparing Principal Financial Group's valuation with that of VOYA Financial, the analyst noted that Principal Financial is trading at a significant premium—2.0 times on a price-to-earnings (P/E) basis, at 9.6x compared to VOYA's 7.6x. This premium is considerably higher than the 10-year average of 0.8x.
Despite recognizing the higher quality of Principal Financial's businesses relative to VOYA, the analyst believes that the current market dynamics do not justify such a large valuation difference.
The report also includes revised earnings per share (EPS) estimates for Principal Financial Group. The firm's EPS projections for 2025 have been lowered from $8.45 to $8.20, and for 2026 from $9.45 to $9.10.
These adjustments are primarily attributed to the fee income headwinds in the PGI and RIS divisions, which are facing challenges such as poor flows and ongoing spread compression. For deeper insights into PFG's valuation and growth prospects, including 12+ exclusive ProTips and comprehensive financial analysis, visit InvestingPro.
In other recent news, Principal Financial Group has been the subject of several analyst adjustments. Morgan Stanley (NYSE:MS) downgraded the financial services company from Equal-weight to Underweight, citing concerns over its long-term outlook, particularly slower growth in its Principal Global Investors and Principal International sectors.
The firm also reduced the price target to $80 from $86. However, RBC (TSX:RY) Capital raised its target for Principal Financial to $91 from $87, maintaining its Sector Perform rating, following Principal Financial's Investor Day.
Principal Financial Group reported a 12% increase in its Q3 2024 non-GAAP operating earnings, totaling $412 million. The company's total assets under management (AUM) also rose by 6% to $741 billion, alongside 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. However, the firm expressed caution regarding the consensus expectations for 2025, suggesting that the anticipated ROE of over 16% might be overly optimistic.
In leadership developments, Principal Financial Group 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.
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