Prudential Financial Inc. (PRU) is expected to post a charge of $100 million in its first quarter earnings as a result of changes made under health care reform regarding subsidies on retiree health care costs.
During 2003, Congress granted the corporations, who were considering dropping coverage to the retirees, a 28% tax-free subsidy for continuing to provide coverage for Medicare cost of retirees. This provided the companies a double benefit as they were able to deduct the cost of providing benefit along with deducting the portion of the drug benefit paid for by the subsidy.
Now with the enactment of health care reform, corporations will be barred from deducting the portion of the benefit attributed to the subsidy, although they will continue to enjoy the 28% subsidy, thus shrinking the overall tax deductibility.
Prudential said that it will have to consider an accounting charge on the deferred tax assets that it had created on the assumption that it would be getting these deductions. This charge will be considered a one-time item affecting the GAAP earnings, which will reduce the company’s first quarter net income. However, adjusted operating income (non-GAAP), which is normally used to analyze the company’s business performance, will not be affected by this charge.
Estimate Revisions
Over the last 30 days, one of the 15 analysts covering the stock has upgraded the estimates for the first quarter of 2010, while no downward revisions were witnessed. Currently, the Zacks Consensus Estimate for the first quarter is operating earnings of $1.30 per share, which would be up by 23.4% from the year-ago quarter.
The absence of downward estimate revisions for the first quarter indicates a likelihood of upward pressure on the performance of the stock in the near term.
With respect to earnings surprises, the stock has been almost steady over the last four quarters, with three positive surprises. The average remained positive at 20.7%. This implies that Prudential has surpassed the Zacks Consensus Estimate by 20.7% over that period.
The downside potential for the estimate for the first quarter, essentially a proxy for future earnings surprises, currently stands at 6.9% for Prudential.
Other companies like AT&T (T), Caterpillar (CAT), AK Steel (AKS) and Deere & Co. (DE) expect charges of $1 billion, $100 million, $31 million and $150 million, respectively, in relation to the overhaul of tax deductibility on subsidy.
Prudential is slated to release its first quarter 2010 earnings on May 5, 2010, after the market closes.
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