Prudential’s share price is 45% under its ‘fair value’ so is it time for me to buy?

Prudential’s (LSE: PRU) share price has dipped 7% in the past three weeks following a strong bullish run since January. I think part of this came from profit-taking after the spirited run-up in price.

Another part resulted from US President Donald Trump’s 10 October announcement of a further 100% in tariffs on China. Since the 2021 demerger of its US business, Prudential has focused on Asia and Africa.

That said, as with Trump’s previous tariff announcements, this one could be subject to change, following negotiation. Consequently, Prudential may currently be a short-term risk/long-term reward play.

The stock’s price-to-valuation gap

Given the recent dip, Prudential’s currently trading around £9.87. However, this doesn’t equate to its value. Price is just the level the market will pay for any asset. But value reflects the fundamental worth of the underlying business.

Often there is a gap between the two metrics, and in it can lie big, long-term profits, in my experience (35 years as a private investor and several years as an investment bank trader).

A discounted cash flow analysis is the best way I have found of determining such a gap. It identifies the price at which any stock should trade, derived from cash flow forecasts for the underlying business.

In Prudential’s case, it shows the shares are 45% undervalued at their current £9.87 price. Therefore, their ‘fair value’ is £17.95.

Secondary confirmations of this undervaluation are seen in comparisons of key stock measures with their peers. For example, Prudential’s price-to-earnings ratio of 10 is bottom of its competitor group, which averages 18.8. This group comprises MetLife at 13, Manulife at 13.8, Allianz at 13.9, and Aviva at 34.4.

How does the core business look?

Recent results for Prudential have been very good. Its 20 March 2024 numbers showed adjusted operating profit climb 10% year on year to $3.129bn (£2.34bn). New business profit jumped 11% to $3.078bn, while earnings per share rose 8% to 89.7 cents.

Its subsequent H1 2025 results delivered on 27 August saw adjusted operating profit rise 6% to $1.644bn. New business profit increased 12% to $1.26bn, while earnings per share rose 12% to 49.3 cents.

A longer-term risk remains China’s economy as the main engine underpinning much of Asia’s growth. That said, it reached its 5% annual economic growth target last year.

It has the same target this year and Q1 saw it hit the 5.4% level, while it was 5.2% in Q2. Q3’s came in today (20 October) at 4.8%, against expectations of 4.7%.

That said, analysts forecast that Prudential’s earnings will grow at an average of 9.1% a year to end-2027. And these are what ultimately power any company’s share price and dividends over time.

My investment view

I already own several other stocks in the financial sector and buying another would unbalance my portfolio. Therefore to buy it I would have to sell one of my existing holdings.

Having run the numbers, I do not think Prudential merits me doing this. That said, it has strong earnings growth prospects, and it is deeply discounted to fair value.

So I think it is well worth the consideration of other investors who do not have similar portfolio concerns.

The post Prudential’s share price is 45% under its ‘fair value’ so is it time for me to buy? appeared first on The Motley Fool UK.

More reading

• This UK insurance giant is one of the top growth stocks on the FTSE 100!

Simon Watkins has positions in Aviva Plc. The Motley Fool UK has recommended Prudential Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

See author's posts