Wednesday, June 6, 2007

Pru Is Done Doing Your Research

Joshua Lipton (Forbes)

Prudential Financial told Wall Street on Wednesday that it's slimming down, cutting away its equity research business as it concentrates on its core divisions of life insurance and asset management.

The company announced that it's closing down Prudential Equity Group, its equity research, sales and trading business. Effective immediately Prudential Equity Group will drop coverage of the sectors and companies it covers.

Prudential Financial (nyse: PRU - news - people ) didn't spell out why it's choosing to discontinue the division, which is a small part of the company's business. Last year the group reported revenues of $260 million. To put that in some perspective, the company as a whole generated revenue of $32.49 billion.

Prudential has been slimming down its operations over the past several years. Back in 2003, it combined its securities unit with Wachovia (nyse: WB - news - people ). Under that arrangement, Wachovia owns a majority stake and runs the joint venture, now known as Wachovia Securities. Wachovia Securities has 10,600 advisers in 2,700 locations around the world. (See " Wachovia Snatches Up A.G. Edwards.") Jeffrey Schuman, an analyst at Keefe, Bruyette & Woods, said the decision to ditch the equity group wasn't particularly surprising. "There have been rumors of the company selling or closing down the operation for some time," Schuman told "The unit hasn't been making money, even under good market conditions. So it wasn't surprising that they would get out of the business."

Also, Schuman noted, the division was simply, at this point, outside of the company's core businesses. "They are now really focused on retirement savings products and insurance protection products," he said. "Brokerage business isn't a part of their future."

Schuman added that Prudential maintains sizable life insurance operations and asset management operations. And he argued that the company continues to run those divisions quite well. He pointed out that the when the company went public in 2001, it had a return on equity of 6%. Last year, the return on equity was 15%.

"That is a heroic improvement," the analyst said. "They have done some successful acquisitions and managed capital well." He rates the company "outperform." Standard & Poor's analyst Tanjila Shafi wrote to clients that Prudential's departure from its equity research business is in line with the company's overall cost-cutting strategy.

The analyst maintained his 2007 operating estimate of earnings per share, $7.16, but increased the 12-month target price by $2 to $118. Shafi maintained a "strong buy" opinion on the company. In afternoon trading, shares of Prudential deceased 1%, or 97 cents, to $99.60.

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