MBIA Court Case Outcome Looks Favorable

Mar.30.12 | About: MBIA Inc. (MBI)

MKM Partners just initiated coverage of MBIA (NYSE:MBI) with a "buy" rating and a 12-month price target of $18.

The increase is due to a "favorable" outcome of the company's current court case. MBIA is in the mortgage-bond insurance business, and has been suing Countrywide, now a subsidiary company of Bank of America (BAC), for fraud. MBIA has a major advantage in the case because a New York state court ruled that MBIA doesn't have to directly link fraudulent statements to defaults. Earlier in the case, MBIA won the right to use a statistical sampling to help prove its case. About the recent ruling, MBIA Chief Executive Jay Brown stated, "The ruling provides us with a straightforward path to recover of our losses."

MBIA also has implications for the value investor. MKM estimates that MBIA's book value is $24.78 per share and anticipates "billions of cash inflows when the rep and warranty cases are settled or tried."

If you have a value approach to investing, or if you have an event-driven approach, MBIA's stock may be a candidate for you. Be warned, MBIA still has to prove that the fraudulent statements made by Countrywide insurance were influential enough to get MBIA to buy the bonds.

Click to enlarge
Trade: MKM suggests Bull Call Spread, May 12 @ 10 / 13

Disclosure: I am long MBI.