I wrote an article several months ago explaining what Genworth Financial (GNW) does, and why Genworth was undervalued. At the time of the article Genworth was trading around $7.44/share. Between now and then Genworth's stock price has fluctuated dramatically, often going up and down 6 percent or 7 percent in a single trading session. Unfortunately, it hit a new 52-week low of $4.80/share during this time as well. Despite hitting new lows after Q2 earnings, I kept faith. Genworth did not disappoint, jumping almost 17% the day after it reported Q3 earnings. Genworth is trading at around $6.80/share at the time of this article. After reviewing Genworth's most recent 10-Q, I still strongly believe that this stock could double within a year, and triple within the next three years.
Highlights from Q3
- Genworth had Net Income of $29 million. This low number was mainly due to unfavorable taxes levied against the International Business segment.
- Net Operating Income increased 358% Year/Year.
- Losses due to the U.S. Mortgage Insurance segment decreased by 50% Y/Y. Delinquencies declined 14% Y/Y, while new insurance written increased 13% (this insurance is of the highest credit quality.) Cure rates remained relatively flat, while loss mitigation savings numbered $168 million for the quarter.
- Book Value Per Share is $33.16/ share an increase of 10% Y/Y. Mainly due to continued Unrealized Gains in the investments that are transferred to Other Comprehensive Income, and are not logged in Net Income.
- Genworth has an extremely low forward P/E ratio of 5.43. With analysts expecting earnings of $1.28/share in 2012, and an average industry multiple of around 9, that leaves Genworth (GNW) with a lot of room to grow.
- Retirement and Protection business segment continues to provide stable revenue and growth with a total of $120 million in net operating income, an increase of around 8% Y/Y.
- 36 state regulators have given their consent, and allowed Genworth to raise the premium on select longer duration long term healthcare products. This is expected to increase total revenue by around $70 million.
- There was a net investment loss of $75 million. This can be attributed to selling of certain securities below their cost basis. Genworth has a policy of holding securities indefinitely, and rarely selling them at a loss, but due to the market volatility and ever changing economic conditions it felt it had to get rid of some securities.
- Net Investment Income increased $27 million Y/Y to $842 million.
- Genworth is going to issue a minority IPO for their Australian Mortgage Insurance business, which will give it access to $600-700 million in additional liquidity.
- The International business segment saw a decrease Y/Y in new mortgage insurance written, which indicates a smaller origination market. Overall, the International business segment continues to be a steady source of income for Genworth, and continues to offset losses associated with U.S. MI business segment.
- Genworth generated positive cash flow of $512 million this quarter, and with $3.6 billion in cash it has roughly $7.43/share.
- Genworth has decreased its long-term debt by $244 million since last year. Current long-term borrowing stands at $4.7 billion.
Despite my extreme enthusiasm for Genworth's future prospects, I am not completely blinded to the potential risks that their business segments face.
- With interest rates expected to stay at record lows for at least the next year to a year and a half, Genworth will have to invest in riskier securities, as the safer investments mature, in order to maintain a sustainable net interest margin (I am currently working on an article to show a more in depth look at Genworth's investments.)
- If the United States goes back into an economic recession the U.S. Mortgage Insurance business could get hit with a new wave of defaults. There are two things that make me skeptical this could happen: First, Michael Frazier (CEO), has stated that if the U.S. Mortgage Insurance business continues to drag on operations as a whole, he will separate it from Genworth's core businesses. Second, The mortgage insurance written in the past several years has been of the highest credit quality, this greatly reduces the chance of mass defaults on Genworth insured mortgages.
Genworth has traded with extreme volatility the past year, so if you buy the stock be ready for the ups and downs. Personally, I have been trading Genworth since my article, due to the extreme volatility, and I have made some substantial gains, but I believe that with last quarter's results Genworth has started a long-term upward trend. I started averaging in (for the long term) around $6.80/share, and I currently have a cost-basis of $6.72/share. Of course, with the powder keg that is Europe still sitting across the pond, I could be jumping the gun, but as Warren Buffett (Or was it Keynes?) said, "I would rather be approximately right than precisely wrong."
Disclosure: I am long GNW.
Disclaimer: I reserve the right to alter my trading position at any time. Please do your own due diligence before investing in any securities.