Thursday, September 17, 2009

Genworth Financial (NYSE:GNW): Upgraded to Buy from Hold at Deutsche; $18 price target

Deutsche Bank upgrades Genworth Financial (NYSE:GNW) to Buy from Hold with a $18 price target (prev. $7).

According to the analyst the upgrade comes as as the $600 million equity capital raise further improves holding company liquidity. This should continue a virtuous cycle whereby the company’s cost of debt declines, the ability to refinance debt and extend credit facilities increases, financial strength ratings stabilize, and operating performance improves. Firm increased their target price to $18 from $7 as their primary concerns have diminished. Deutsche's EPS estimates were revised to factor in the capital raise and 3Q’09 mortgage insurance arbitration settlement.

No near-term pressure on the holding company
Following the equity offering, the firm estimates Genworth’s holding company has $1.5 billion of cash and short-term investments, which should be sufficient to meet debt service needs through the end of 2011. The next debt maturity is not until June 2011, which is a 57 billion yen security ($630 million). Genworth could also monetize its $1.5 billion remaining stake in its Canadian mortgage insurance business, if needed.

Capital shortfalls in the European mortgage insurance subsidiary would need to be funded by the holding company. That business has approximately $250 million of capital and $250 million of unearned premium supporting $6 billion of risk in force. Should any capital shortfall occur, Deutsche would expect the ultimate size to be manageable.

Further upside if life earnings power can be increased
To the extent the price increases, cost savings, and redeployment of excess liquidity in the life insurance business can lead to a higher ROE than firm's normalized estimate of 7% for Genworth’s life segment, the stock’s valuation multiple would have further to expand. The company is also increasing prices in its mortgage insurance and lifestyle protection businesses.

Deutsche expects the US mortgage insurance business to suffer from losses through the end of 2010; however, to the extent housing prices and unemployment stabilize in 2010, this business could return to profitability in 2011. Based on their expected losses through the end of 2010, the firm estimates the US mortgage insurance capital position would decline to approximately $900 million from $1.9 billion in 2Q’09. The risk in-force to capital ratio would increase to 31x, which would be above the maximum regulatory capita l ratio of 25x. The insurance regulators, however, have shown some flexibility as they are willing to let the mortgage insurers operate above the 25x ratio. Genworth’s mortgage insurance regulator in North Carolina passed such a law in July.

Notablecalls: While Barclays beat Deutsche to the punch 2 days ago (right following the offering) the call is likely to push GNW stock further higher.

I think $14 (or possibly somewhat higher) may be in the cards today as most of the other tier-1 houses still haven't upgraded their ratings or even adjusted price targets higher (most are in single digits). So playing Ketchup may be the theme here for quite some time.

2 comments:

Ronald said...

This recommendation was published 7.00 am, not 5.32 as written. :P

notablecalls said...

Must say I have become more cautious of the call here.

If long, I would not let this one dip below say 13.40 level.

Basically I think this call needs the market to cooperate. Right now the market seems to be going down.