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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Genworth

November 13th 2009 Genworth
NYSE Symbol: GNW
Industry: Insurance
Price as of 11/5: $11.27


The rally continues as the Dow broke out this week to new highs for the year moving above 10,300. The third quarter earnings have come in better than expected with many companies raising guidance including this weeks featured stock, Genworth Financial. As indicated in the name, Genworth is a financial company which gives many investors pause, as it should. Genworth was a spin off from General Electric back in 2004 and provides various insurance, wealth management, investment, and financial solutions. It's the mortgage insurance division that got Genworth into trouble, causing the stock to drop below a dollar a share earlier this year. Since the March lows, Genworth's stock price and business prospects have improved dramatically. A couple weeks ago, Genworth reported better than expected earnings providing the opportunity to raise guidance for 2010. The stock remains cheap as many investors stay on the sidelines due to the volatility in Genworth's earnings. But for growth investors willing to take on some risk, Genworth provides good recovery prospects as the economy eventually recovers.
At the end of October, Genworth reported better than expected earnings.
Operating earnings came in at 18 cents a share above consensus of a negative 2 cents a share. Results were driven by significantly lower losses in U.S and broad improvement in both Canada and Australia, including Genworth's overseas payment protection business. It has to be noted that most segments within Genworth continue to struggle including group insurance commission and annuities, however these segments are strategically less important earnings drivers for Genworth in the longer run. Genworth has been able to significantly reduce losses by way of loss mitigation and captive reinsurance to a lesser extent. As a result of the improving fundamentals, the book value grew by 10% sequentially to $25.42 per share from $23.01 per share, reflecting improvement in the investment environment and the additional equity capital partially offset by an increased number of shares.
The better than expected earnings have led to a number of upgrades.
Credit Suisse upgraded the stock with a $13 price target. Deutsche Bank was a little more bullish indicating that the stock should trade closer to their valuation of $18 a share. Bank of America/ Merrill Lynch analyst said that Genworth has been aggressive on impairments, which suggests less risk of a negative surprise on realized losses going forward. Their target is $13 a share.
As the economy improves, Genworth's earnings should continue to improve. Currently the stock trades for 10 times next year's earnings, 0.6 times sales, and an amazing 0.44 times book value. The stock would have to rally 120% just to get back to their book value which it could easily do over the next several years. However, the road will be bumpy which is why Genworth is not a conservatove investment. Plus there is no dividend, but long term investors should get rewarded with this financial stock.