Genworth Financial: What's It Really Worth?

Dec.22.09 | About: Genworth Financial, (GNW)

Genworth Financial (NYSE:GNW), a provider of many types of insurance and other financial instruments, was among the most volatile stocks in the entire market during 2009. The company was on the ropes when the market was reaching its lowest point in March, and even dipped below the $1 mark for some time. As the economy has recovered through the rest of the year, so has Genworth, and it is poised to end the year as one of the top performers on the S&P 500 rising more than 300% in 2009. With that said, it is not what has happened in the past that matters to investors, and opinions vary widely as far as Genworth’s value going forward.

On Tuesday, Genworth was among five companies who had their credit ratings downgraded by Standard and Poor’s thanks to its exposure to mortgage insurance. S&P downgraded the debt of a Genworth subsidiary, Genworth Mortgage Insurance Corp., two notches from BBB+ to BBB- (the lowest grade above junk) and the outlook on the unit remains negative. The sweeping downgrades by the credit rating agency reflect their opinion that despite improving economic conditions, the recession has had an abnormally large impact on the mortgage market. The latest data on the growing number of mortgages that are seriously delinquent—across various grades of mortgages from subprime to prime—seems to back up this opinion.image

Genworth offered an updated outlook on their mortgage unit in mid-December and said that the company expects the greatest losses from homes sold at the peak of the housing bubble of 2006-2007 will crest in the coming year. The President of the mortgage insurance unit at Genworth Kevin Schneider said, “There was a lot of product originated in those years that frankly never should have been originated at all.” Genworth has tightened underwriting standards as a result and has needed to increase rejected claims for losses on loans based upon false information. In that presentation, Genworth said they expect mortgages underwritten in 2008 and 2009 to be profitable, leading to the unit to return to profitability as soon as 2011. On the whole, Genworth’s mortgage insurance and all other units combined, swung to a profit after five straight losses in the fiscal third quarter.

At Ockham, we have maintained an Overvalued stance since October because the stock has seen such appreciation well in advance of the fundamentals justifying such gains. Analysts are expecting fiscal 2010 earnings of $1.10, which would make the valuation look attractive, but that seems to expect quite a bit out of Genworth’s other units if the mortgage unit sees its peak losses next year. As capital markets have healed this year, GNW has raised capital through asset sales, a debt offering, and a secondary offering of stock in order to provide a cushion for any future losses.

Can the stock go higher? Absolutely. But it would seem to us a risky investment based on the current valuation. We would prefer to see the headwinds of mortgage delinquency and unemployment improve before we would look more positively on GNW’s prospects.

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