(By Kevin Donovan) Put another shrimp on the Barbie, mate. As if unpaid U.S. mortgages in the recent housing debacle didn't deliver enough of a beating to Genworth Financial Inc. (GNW), sour first-quarter results marked by mortgage insurance losses in Australia depressed shares anew.
Speaking of Australia, the initial public offering of a minority stake in the mortgage insurance unit was postponed last month to sometime next year, a blow to confidence and a disappointment to investors who had bid up Genworth on the expectation that proceeds from the IPO would be used to shore up the balance sheet and buy back stock.
The share price, which closed Thursday at $5.24, has declined 26% year to date and double that in the past 12 months, trading in a 52-week range of $4.80-11.30.
In the first quarter, Genworth earned $0.06 per share in operating earnings, far short of the $0.12 Wall Street was predicting. The biggest hit came in the global mortgage insurance business, with Australia contributing the lion's share of losses in that sector, leading to the resignation of the chief executive officer, Michael Fraizer.
Acting CEO Martin Klein, who is also the company's chief financial officer, was dutifully straightforward, commenting in a press release the company was "very disappointed about performance of our Australia MI business this quarter and its impact on the timing of the minority IPO."
Sorry doesn't feed the kitty, though. So, on May 9, Klein purchased 15,000 shares at $5.60. And on May 21, director James S. Riepe bought 45,000 shares at $5.00. Other insiders have been buying recently as well.
Meanwhile, Klein noted other steps Genworth has taken to refocus the business. "The completed life block sale transaction, the sale of Genworth Financial Investment Services, and a $100 million life company dividend payment in April for a portion of the Medicare supplement sale proceeds are all important steps as we rebuild value," he said.
And we think it will. Genworth trades at just 3.59 times 2013 earnings estimates vs. 12.50 for the S&P 500 and has a price-to book ratio of just 0.17 vs. the market median of 1.28. But as the company recovers from the Australia misstep, which we think is ameliorated with cash and cash equivalents of about $1.7 billion on its balance sheet, we believe estimates and multiple expansion are achievable.
Apparently, so do Klein and other insiders. Their recent stock purchases give us confidence that a forward PE half the difference between Genworth and that of the market is achievable. On $1.46 projected 2013 earnings, a multiple of 8.5 gives us a target of $12 per share, more than double the current level.
Genworth has approximately 6,400 employees and operates through three divisions: Insurance and Wealth Management, which includes U.S. Life Insurance, Wealth Management and International Protection segments; Global Mortgage Insurance, which includes U.S. and International Mortgage Insurance segments; and the Corporate and Runoff division. Its products and services are offered through financial intermediaries, advisors, independent distributors and sales specialists. Genworth is based in Richmond, Va.