Scotia Capital, 8 May 2009
• EPS of $0.35, below our $0.45 estimate and consensus of $0.45, due to higher-than-expected credit hit of $0.17 (virtually all U.K. hybrid related) versus our $0.03 estimate.
Implications
• The U.K. hybrid hit was entirely due to an increase in actuarial provisions for default related to recent rating agency downgrades. The MV of these fell in the quarter (to $660 million from $1.1B), as credit spreads widened, but could reverse as spreads contract. Slippage in ratings in this portfolio was not immaterial, and if all BBB fell to below BBB we estimate a $0.10 EPS-$0.15 EPS hit.
• Putnam net flows improve over last two quarters but margins remain weak.
• Sales somewhat mixed, Europe was weak.
Recommendation
• We reiterate our 1-SO rating and $27 target, primarily based on attractive valuation, at 8.3x 2010E EPS, and excellent track record. We suspect the noise with respect to credit issues, primarily U.K. hybrid related, will dissipate as spreads continue to contract.
;
• EPS of $0.35, below our $0.45 estimate and consensus of $0.45, due to higher-than-expected credit hit of $0.17 (virtually all U.K. hybrid related) versus our $0.03 estimate.
Implications
• The U.K. hybrid hit was entirely due to an increase in actuarial provisions for default related to recent rating agency downgrades. The MV of these fell in the quarter (to $660 million from $1.1B), as credit spreads widened, but could reverse as spreads contract. Slippage in ratings in this portfolio was not immaterial, and if all BBB fell to below BBB we estimate a $0.10 EPS-$0.15 EPS hit.
• Putnam net flows improve over last two quarters but margins remain weak.
• Sales somewhat mixed, Europe was weak.
Recommendation
• We reiterate our 1-SO rating and $27 target, primarily based on attractive valuation, at 8.3x 2010E EPS, and excellent track record. We suspect the noise with respect to credit issues, primarily U.K. hybrid related, will dissipate as spreads continue to contract.
