Genworth Finl Inc (NYSE:GNW)

CAPS Rating: 4 out of 5

A financial security company dedicated to developing solutions that help meet the investment, protection, homeownership, retirement and independent lifestyle needs of customers, with a presence in more than 25 countries.

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Player Avatar jed71 (32.00) Submitted: 10/12/2011 2:07:33 PM : Outperform Start Price: $8.45 GNW Score: +56.53

It has become quite evident to me that many in the investment community do not understand this company. And I can appreciate that – insurance and annuities are definitely not the simplest businesses in the world to understand or value. Some will say there is a loss of confidence in the company’s leadership among investors, and I cannot say I disagree. As Steve Eisman said in late 2010 about GNW during one of the conference calls, “Frankly the only accomplishment that this management’s team can point to is the survival of this Company.” The quote may be off slightly, but you get the general gist of it. I think his comment is a little harsh and unfair, given the macro-economic environment in the US, but everyone has the right to their own opinion.
The recent price declines have offered investors an extremely attractive option, if they are willing to be patient and wait for a few years for this to pay out. Remember, this issue was sitting at $13 just a few short months ago. What has really changed in their business model? They shed their Variable Annuity business, which was sucking wind. Is this a bad move? I can’t think it was – they were a small player in a highly competitive business. And yes, I totally understand that they had very large reserves that they had to put up for their domestic MI business, but I guess I don’t believe that is the entire story for this firm. Honestly, did anyone really believe US Mortgage Insurance losses were getting better?!?!? And If you look at their MI business, it is probably one of the best run in the US (I guess that’s not saying very much when you are comparing it to the monolines – RDN, PMI, and MTG – all of whom have gotten completely decimated in recent months). In one very clear way, though, this company has a distinct advantage. They can capitalize losses in MI through earnings from their other product lines. Unless I am mistaken, very few large MI businesses in the US have the ability to do this (I can think of GNW and United Guaranty - owned by AIG). MI is a substantial portion of GNW’s business but the other business lines seem to be making very good money. Earnings estimates for 2012 and 2013 seem significantly higher than 2011 actual 1st half plus 2nd half estimate. Let me preach on:
2012 estimates $1.40 per share
2013 estimates $1.93 per share
So $1.40 in net earnings per share outstanding next year. At a very conservative 8 times ratio of net earnings, I get a value of $11.50 a share. And with this estimate most analysts are assuming either zero value or extremely low value in the domestic MI business. Do I think their MI business is worth nothing? Heck no. Like I said before, it’s better run and capitalized than the other MI’s on the market. Based on its size, and comparing it to other MI business’ current valuation, I believe it’s worth about $3 a share conservatively. So I am getting a total enterprise value of about $14-15 per share, way higher than the current sub $6 valuation. The 2013 earnings estimates seem to support this valuation as an 8 P/E of 2013 is right around $15 a share. $15 would also still be considerably lower than its current tangible book value of about $23. So, in short, I think this stock is once again massively undervalued. This is a longer term play, though, unless another insurance company sees the same value I am seeing and snaps them up at a discount. It often takes the market a significant amount of time to properly value issues at a steep discount such as this. As always, do your own DD, take your time, and make the decision that’s best for you. Disclosure : I own shares.

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