Tuesday, September 15, 2009

Genworth Financial (NYSE:GNW): Target raised to $17 from $10 at Barclays

Barclays is raising their target on Genworth Financial (NYSE:GNW) to $17 from $10 following the company's announcement that it will begin on Tuesday a $500 million equity-raising effort. Even though the stock is being sold at a sharp discount from book value -- and that sale of shares, therefore, will reduce Genworth's book value per share by about 7% to roughly $25 -- firm views the equity-raising effort as part of a larger successful initiative that's been under way for some time at Genworth to right itself.

Indeed, earlier this year, when it looked somewhat questionable that Genworth would be able to redeem maturing debt, Barclays began applying a 50% discount to peers' price-to-book multiples in order to arrive at an appropriate price-to-book ratio for Genworth. Genworth seemed to be having problems on multiple fronts -- in domestic mortgage insurance, to be sure, but also in life insurance, long-term-care coverage, lifestyle protection, and on the investment side of its balance sheet. Since then, however, developments have turned decidedly more positive for the Richmond-based insurer.

Clear signs of housing-market improvement in Canada and Australia have emerged.
Prices have been increased in the company's Lifestyle Protection business that have helped to offset the drop in earnings associated with rising unemployment in Europe, especially in Spain and Ireland. Risk in the investment portfolio has been cut. Cash has been raised at the holding company through the sale of a minority interest in the Canadian mortgage-insurance operation.

Even in domestic MI, which has been the deepest source of Genworth's difficulties, things seem to be, if not getting better, then stabilizing. In particular, while prime-mortgage delinquencies and delinquencies from geographies outside the so-called SAND states -- Florida, California, Arizona, and Nevada -- are rising, delinquencies from the SAND states and on alternative products such as alt-A mortgage are falling, leaving the overall rate of growth in delinquencies flat. The average reserve per delinquency, meanwhile, has stabilized at about $23,000, a reflection of the shift of the delinquencies away from the SAND states, where claims have tended to be higher than elsewhere in the country.

Barclays' bottom line is that while Genworth is not yet on an entirely solid footing -- the June quarter showed continued cash outflows from many of its assets-under-management product lines, and the improvement in domestic mortgage insurance, while real, has nonetheless been modest -- they do view the company as better able to ride out the recession than they thought just a few months ago. Certainly the myriad actions the company has taken, which also have included sharp cuts in costs, have left the company in a far better liquidity position than it was in earlier this year, in our view. Holding-company cash now stands at $800 million, excluding the proceeds from the equity issuance that was announced last night. And that is after
having paid down debt. The company continues to experience difficulties but has exited its most challenging period. Firm's new higher price target of $17 reflects this improved reality. We reiterate our 1-Overweight rating.

Notablecalls: That $500 million equity offering has been in the cards for months. I got a heads up on it from a tier-1 firm sales guy about a month ago and was actually surprised it took so long to be announced.

So, anyway...here it is. It will put the co on a much more solid footing and that should be reflected in valuation.

Thomas Graff over at RM commented on Genworth bonds noting 5.75 due in 2014 traded many times in the last few days in the $79-81 area. Hearing post-common offering the bonds are bid at $87.

This one should trade up today.

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