Genworth Financial, Inc. (GNW) just announced financial results, as well as the resignation of CEO, Michael Fraizer. The company earned $47 million in the first quarter of 2012, or about 9 cents per share. This was lower than the $59 million or 12 cents earned in the same period last year. It was also below analyst estimates of 11 cents per share. A new concern is that the mortgage insurance division posted losses of about $36 million, which is a reversal, when compared with the $16 million profit it earned in the same quarter last year. Genworth shares saw a substantial drop after the company announced it would delay the initial public offering of its Australian mortgage insurance unit. This event was expected to raise a substantial amount of capital and strengthen the balance sheet, which has been hit hard by the weak housing market. Australia has been suffering from major floods in certain areas, and it also has experienced weakness in the economy and housing market. These were some of the reasons Genworth cited for the delay in the initial public offering. There appears to be a strong case to make for buying Genworth shares at this level, but it also looks like an equally strong case can be made for selling the stock as well. Below is a look at some of the positives and potential negatives of an investment in Genworth:
The positives of investing in Genworth:
- Genworth is a diversified company and fortunately, the company offers long-term care insurance and other financial products, which remain profitable. This is helping to offset the losses in the mortgage insurance division.
- Some economic data has been trending in the right direction and this could help lift the housing market, which would in turn, lower foreclosures and mortgage losses. The debate seems to be whether real estate will bounce along the bottom for many years, or if it will actually head higher. Some markets are even seeing multiple offers, and lower inventory levels. A recent Wall Street Journal article is calling for a "prolonged bottom." Either way, it's a positive for Genworth if housing has at least stabilized.
- The IPO for Genworth's Australian mortgage insurance company still appears to be only delayed until 2013, (at least according to the company). If the IPO occurs, and is successful, it is expected to raise around $700 million, which will help bolster the balance sheet in the event of further losses.
Here are some of the potential negatives:
- The Australian housing market could be headed for an even sharper decline, and if that is the case, an IPO for the Genworth division might even be less likely by 2013. In addition, losses could grow even deeper by next year. A top CEO said the economy in Australia is "slowing significantly," and that could mean bigger mortgage losses. It could also mean that the window of opportunity for an IPO of a mortgage insurance company has already closed.
- A recent Bloomberg article points out that some analysts and investors see growing doubts over the credibility and management decisions with Genworth's CEO, Michael Fraizer. After all, Genworth has lost about $1.8 billion on mortgages in the last few years, and the delay or possibly lost opportunity to raise capital with the Australian IPO is another major blow for shareholders. Since the CEO just resigned, this helps address some of these concerns, but it also raises new doubts since investors don't know how the new CEO will perform.
- The Bloomberg article also points out that credit-default swaps for Genworth have recently surged and now indicate a 43% chance of default within five years. The odds of a debt default were about 29% in March and investors should watch this because if the credit default swaps continue to rise, investors might see more losses in the stock.
The continued losses for the mortgage insurance companies makes it tough to invest in this sector at all, especially with the smaller, less diversified companies, some of which are shown below. At least with Genworth, there are other sources of potential revenue and profits to help offset the mortgage insurance division. Even years after the financial crisis started, it appears too early for Genworth to see a sustained and substantial profit recovery.
Here are some key points for GNW:
Current share price: $6.15
The 52-week range is $4.80 to $12.55
Earnings estimates for 2012: 97 cents per share
Earnings estimates for 2013: $1.62 per share
Annual dividend: None
Radian Group, Inc. (RDN) also offers mortgage insurance, and it too has been seeing significant losses. Radian reported a fourth-quarter net loss of $121.5 million, or 92 cents per share, and it is expected to report first-quarter results during the first week of May. This appears to be a higher risk stock, due to continued losses and also because it is less diversified when compared with some other financial companies.
Here are some key points for RDN:
Current share price: $2.89
The 52-week range is $1.80 to $6.11
Earnings estimates for 2012: a loss of $2.04 per share
Earnings estimates for 2013: a loss of 18 cents per share
Annual dividend: None
MGIC Investment Corporation (MTG) is another company that provides mortgage insurance products. This stock has been punished by investors over major losses in the past years and it recently reported net loss of $19.6 million, or 10 cents per share. This is an improvement over losses of $33.7 million, or 17 cents per share for the same quarter a year ago. This stock also appears to be a higher-risk investment, and it also offers less diversification when compared with many other financial companies.
Here are some key points for MTG:
Current share price: $3.26
The 52-week range is $1.51 to $9.08
Earnings estimates for 2012: a loss of $1.19 per share
Earnings estimates for 2013: a loss of 28 cents per share
Annual dividend: None
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclosure: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long GNW.