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Lovell: Principal vs. Wall Street


Here’s a conundrum: Profits and revenues continue to rise at Principal Financial Group Inc. And yet the company has a higher-than-normal percentage of Wall Street analysts who recommend that investors avoid its stock.

Of the 18 analysts who track Principal regularly, four have “sell” ratings or the equivalent for the company, six recommend investors buy more shares and eight say they are neutral on the stock.

On the face of it, the fact that 22 percent of analysts want investors to steer clear of a company’s stock doesn’t seem like much. However, sell ratings, though more common in the post-Jack Grubman and post-WorldCom Inc. world, are still rare.

According to Thomson First Call, which tracks analyst ratings, “sell” ratings account for just 10 percent of all Wall Street analyst recommendations among companies in the S&P 500. Even “neutral” ratings were once little more than insider code for “sell,” though that is changing as regulators force more transparency and truthfulness from analysts.

So how did Principal attract more than its fair share of negativity? The short answer, according to the analysts who have “sell” ratings on the company’s shares, is that Principal has been a victim of its own success.

On Monday – the day many readers will open this newspaper – Principal is expected to report per-share profits of 55 cents for the first quarter, reversing a year-ago loss caused largely by a write-down related to the sale of its Australian subsidiary, BT Financial, and because of losses on other investments.

In 2002, the per-share profit for Principal was $2.09. Analysts, on average, expect earnings of $2.31 per share this year and $2.61 for 2004.

The company’s stock trades at a premium price compared with its rivals, and analysts consistently praise Principal’s diversification and its management team.

The company is the nation’s biggest manager of 401(k) retirement plans. In addition to asset management, it offers life and health insurance and has a sizable mortgage banking operation, which has been performing strongly as low interest rates attract new home buyers and encourage existing homeowners to refinance.

Principal’s shares have out-sprinted the competition since the company’s initial public offering in the fall of 2001. In the what-you-have-done-for-me-lately world of Wall Street, it’s this fact that most draws the negativity.

“Principal’s shares have outperformed the broader life group by approximately 35 percent since Jan. 1, 2002,” wrote Goldman, Sachs & Co. analyst Joan Zief in a February note to clients, in which she downgraded her rating on Principal to “in-line” from “outperform.” Goldman was the lead manager of the company’s initial public offering.

Some analysts fret that Principal’s managers have done so well over the past two years or so that there’s little room for performance to accelerate. For the next 12 months or so, they speculate that investors would do better buying the stock of rivals, returning to Principal later.

“Principal’s performance has been phenomenal since its demutualization, both from an earnings perspective and in its share price,” said Mario Mendonca, an analyst at CIBC World Markets, who has an “underperform” rating on Principal. “It now trades at a healthy premium” compared with its competitors.

“It’s a very well-run company,” said Morgan Stanley’s Nigel Dally, who has an “underweight-inline” rating on Principal’s shares. “In comparison to its peers, Principal’s valuation looks full.”

Other analysts argue that the company’s managers have proved themselves by outperforming their competitors. The future holds more of the same, they say, and the shares are worth buying now.

“The key with Principal is that they’ve positioned themselves to weather whatever different market conditions they may be faced with,” said Elizabeth Malone, an analyst with Advest Inc. who has a “buy” rating on the company.

Des Moines Business Record staff writer Michael Lovell writes a weekly column on business issues affecting Greater Des Moines. He appears on Sunday mornings to talk about business trends on WHO-TV. Contact him at 288-3336 or by e-mail at michaellovell@bpcdm.com.

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