It's hard to imagine worse timing. Nearly four years since Prudential Insurance set out to transform itself, "the Rock" is due any day now to sell stock in an initial public offering. Led by Goldman Sachs (GS), the deal figures to raise $3 billion, making it one of this dismal year's biggest. More important to Prudential's 11 million policyholders, the IPO will turn most of them into investors as the insurer "demutualizes," or changes from a mutual company owned by customers into an investor-owned, publicly traded company going by the name Prudential Financial.
If demutualization--the word itself is odious--weren't head-spinning enough, Pru is coming to market with a wide-ranging notion of its own value. Pru executives are keeping quiet ahead of the deal. But their filing with the Securities & Exchange Commission suggests a range as wide as Gibraltar, from $25 a share to $30 a share. This tells me that initial trading will be relatively inefficient and may---just may, in this bear market and cloudy climate for insurers--offer investors an unusual opportunity.
That's why I have worked up a little something I call the Prudent-O-Meter. It's a gauge of the opportunity, and danger, presented by Prudential's IPO:
-- At $30 or higher. Wall Street often values insurance and many other financial-services companies on multiples of their equity, or book value. At $30 a share, Prudential would sell for 0.83 times book value. That's a steep discount to such premier names as American International Group (AIG) (4.4 times book) or even Merrill Lynch (MER) (2.1 times). It's even below Pru's most comparable rival, MetLife (MER) (1.2 times). Yet Pru shapes up poorly next to Met. It's smaller by sales and earnings while suffering far narrower profit margins and a much higher load of debt (table). Buy Pru at $30 or above? Prudent-O-Meter says: only if you've got rocks in your head.
-- At $27.50. If Pru settles for a price at the midpoint of its range, its price-book ratio shrinks to 0.75. In the ballpark, maybe, if you have reason to be confident that Pru can make good on its aspiration "to be a worldwide financial services leader in both the growth and protection of our clients' assets."
So I searched the fine print in Pru's filing for confidence-builders. It does aim to cut $500 million in annual operating costs. Beyond that, I mostly found signs of mediocrity. Pru is the No. 8 brokerage firm, the No. 16 property-casualty insurer, the No. 23 mutual-fund manager. Even at its core, life insurance, Pru in the U.S. ranks only No. 3 in sales to individuals. The world already is stacked with heavyweights lunging after the same prize, from AIG and AXA (AXA) to ING Groep (ING) and Citigroup (C). Pru at $27.50? P-O-M says you're an optimist, the sort who bets cash money on a career .220 hitter breaking .300 next season.
-- At $25 or below. Here, Prudential would go for less than 0.7 times book value. Pru obviously is not my idea of a killer company. Yet no other big U.S. financial stock goes so cheap. Yes, there are questions. The biggest is simply whether Pru can deliver profits that don't depend, as they have so heavily in recent years, on such undependable sources as growth in its own pension-fund assets. Pension-fund credits, for instance, accounted for $346 million, or 25%, of Prudential's pretax profit through Sept. 30 this year.
Still, Pru at $25 or less could offer an opportunity to exploit management's eagerness to demutualize, perhaps at most any price. P-O-M's needle points back at the historical record: MetLife went public in April, 2000--another moment of market agony--at under 0.8 times book, or $14.25 a share, just above the bottom of its estimated range. Since then, it has never traded lower.
Despite my great confidence in the Prudent-O-Meter, it cannot gauge one unavoidable risk. Prudential expects 4 million of its policyholders to wind up with fewer than 100 shares in the new public company. They, plus the rest of Pru's policyholder-investors, will be free to dump a collective 456 million shares, 81% of the total outstanding, at any time. Imagine Pru's stock price if millions of those hit the market at the same time. Might be like the British trying to float the Rock of Gibraltar. By Robert Barker