AXA Equitable's Valuation Doesn't Reflect Its Solid Fundamentals, Morgan Stanley Says In Positive Initiation

Financial services company AXA Equitable Holdings Inc EQH recently offered 137.25 million shares in an IPO at $20 each. With the IPO quiet period expiring, the sell-side is starting coverage of the company.

The Analyst

Nigel Dally, an analyst at Morgan Stanley, one of the lead book-running managers and underwriters for the offering, initiated coverage of AXAEquitable at Overweight with a $26 price target, representing 21-percent upside.

The Thesis

AXA Equitable remains on track to deliver solid earnings growth and return on equity expansion through portfolio optimization, expense initiatives and the growth of "higher-return, less-capital-intensive business lines," Dally said in a Monday note.

The company's ROE for 2017 was 12 percent, while it looks to achieve a mid-teens ROE by 2020, the analyst said. The target is achievable, Dally said, thanks to investment portfolio repositioning, expense reduction and a business mix shift from the legacy block business to higher ROE product lines.

Morgan Stanley estimates earnings per share of $3.60 and $4 in 2018 and 2019, respectively.

Solid fundamental prospects are not reflected in AXA Equitable's valuation, Dally said, prompting him to recommend building a position in the stock at today's levels. 

The equity trades at a depressed price-to-earnings ratio of 5.4 times its estimated earnings for 2018, a small premium to peer Brighthouse Financial Inc BHF's valuation but significantly below the valuation of Lincoln National Corporation LNC, the analyst said. 

The Price Action

Since its May 10 listing, the stock has gained 5.9 percent to $21.54.

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