(By Balaseshan) UBS Securities analyst Suneet Kamath initiated coverage of life and mortgage insurer Genworth Financial Inc. (NYSE:GNW) with a "Neutral" rating and $5.50 price target, saying volatility from business mix levered to pro-cyclical factors hurts valuation.
Kamath views the stock as largely a play on macro economic developments. In his view, the company's business unit sensitivity to macro variables limits management's ability to drive predictable return on equity (ROE) improvement. Since, 2007, ROE's have deteriorated across all segments, not just the headline U.S. mortgage insurance (MI).
The analyst said departure of CEO Fraizer and recent stock price decline increase probability management will consider restructuring. However, previous challenges around separating U.S. MI still exist, while depressed profitability across most segments, including weak Australia MI performance and impact of falling interest rates, are major obstacles.
Kamath said long-tail of some segments' liabilities and low sales levels slow ROE expansion prospects. Recent sales across most segments down about 25-75% from 2005-2008 levels, so recent pricing actions will take time to "move the needle".
The analyst said U.S. Life segment under pressure as recent competitor exits and GNW re-pricing in long-term care signal profit concerns, and slow growth expected in individual life market.
Kamath said price target based on an equal-weighted approach using regression of forecasted ROE / cost of equity versus price-to-book ratio and a price-to-earnings target relative to the S&P 500 of 30%. He does not factor in potential ROE expansion post-2012 given limited visibility due to heavy reliance on macro improvements.
The brokerge established its 2012 EPS estimate for Genworth Financial of $0.49 and its 2013 estimate of $1.24.
GNW is trading down 3.02% at $5.14 on Wednesday.