There's still ample economic wreckage from the housing bubble and crash, but many participants have clawed their way back and are starting to see signs of normalization. Major mortgage issuers like Wells Fargo (NYSE:WFC) are back to paying dividends and thinking about long-term growth strategies, while insurance companies like MetLife (NYSE:MET) are largely secure from a capital standpoint (even if U.S. regulators don't completely agree).
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Genworth (NYSE:GNW) is a different case. While the stock and company are clearly back from the brink of complete ruin (the stock traded for less than 90 cents just over three years ago), the company is not exactly strong or thriving again. The resignation of the company's CEO may facilitate a better turnaround strategy, but investors considering these shares are going to have to have patience to see the investment work out.
SEE: Patience Is A Trader's Virtue
First Quarter was Another Step Back
Arguably the best thing about Genworth's first quarter was something that is generally seen as a significant negative--the resignation of the company's CEO Michael Frazier. More on this in a moment.
From an operational standpoint, there was a lot not to like. Profits from life insurance and long-term care insurance were disappointingly weak, and Genworth surprised the Street with the deterioration in the Australian mortgage insurance business. Performance in the international mortgage insurance business (Canada and Australia most notably) had been something of a positive, but performance in Canada continues to weaken and Australia saw a large increase in claims and severity.
While Genworth exited the quarter with decent enough capital ratios, weakness in core operating income leaves this looking like a company going nowhere fast.
SEE: Zooming In On Net Operating Income
Out with the Old, in with the?
The resignation of Michael Frazier (concurrent with earnings) brought notably little regret or fond reminiscence from sell-side analysts. Although few analysts seem to directly blame him for leading Genworth into the U.S. mortgage insurance debacle that nearly destroyed the company ((Frazier had led the company since before it was spun out from General Electric (NYSE:GE)), the fact remains that he hadn't led the company to a meaningful recovery and had begun to establish a reputation for over-promising and under-delivering.
The question is perhaps not so much about who comes next as it is about how much that person can really hope to change in the short term. Genworth is in a lot of long-tail businesses like life insurance, long-term care insurance and mortgage insurance, and these aren't businesses where you can just make a few changes or launch a new product and see dramatic improvement in a year. What's more, there could still be more pain left in the U.S. mortgage business and that may limit flexibility to some extent.
SEE: Identifying And Managing Business Risks
Growth Is Possible, but It Will Take Time
As companies like MetLife, Hartford (NYSE:HIG) and Prudential (NYSE:PRU) have shown, life insurance isn't a terrible business, but it is one where it is hard to really differentiate yourself or get investors excited about the long-term prospects. In comparison, Genworth's long-term care business may offer better long-term growth prospects, but the fact that companies like MetLife and Unum (NYSE:UNM) have gotten out of the market does make me pause a bit.
SEE: Why You Need A Plan For Long-Term Care
The Bottom Line
There's a curious discrepancy between what sell-side analysts project with their models and what they target as Genworth's current fair value. Most analysts seem to think that Genworth will get back to posting returns on equity in the 7 to 8% range by 2012. If that's true, the shares would seem to be remarkably undervalued unless there is further dilution on the way. Likewise, the company's price/book and price/tangible book ratios are quite low, even granting that the company's current operating performance and return on equity is poor.
I honestly don't know what to make of this. I am worried about the potential for weaker performance in international mortgage insurance and at least one more negative surprise in the U.S. mortgage business. Likewise, I don't think life or long-term care insurance can really power a dramatic near-term turnaround. Accordingly, I'm skeptical about the sell-side models today, but even substantially worse estimates (a higher discount rate and just a 5% long-term ROE) still point to an undervalued stock at today's price.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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