A bevy of statistics suggest Canada’s housing market is indeed in that “soft landing” that, just last summer, seemed a best-case scenario.
Investors need not plow through the homes-sold data for evidence, though: Just look at the shares of three major mortgage-finance companies recommended in this space in June. Genworth MI Canada Inc., Home Capital Group Inc. and First National Financial Corp., plagued by housing fears 10 months ago, have all since risen 50 to 70 per cent.
Yet there’s a cheaper, better-diversified option for investors who want to continue a bet on Canadian housing health: Genworth Financial Inc., the U.S. parent of Genworth MI Canada.
Genworth Financial owns more than half of Genworth MI Canada, so if the Canadian concern continues to increase profits and its share price, the U.S. company will benefit. If it doesn’t, there’s an improving U.S. insurance market to offset any trouble. And, importantly, Genworth Financial is cheaper than its Canadian subsidiary, still trading at a deep discount to its peers.
Of course, “deep discount” and “Genworth Financial” have gone together for some time, considering the company’s main business of insuring mortgages. At the depths of the U.S. housing/financial crisis in 2009, the shares traded for as little as 85 cents. Today, at $17.82 (U.S.), they’ve risen more than 2,000 per cent.
Yes, you have missed that part of the ride. But even with such otherworldly returns, Genworth Financial shares have more room to increase.
The forward price-to-earnings ratio of 13 is not the story. Instead, it’s the ratio of the company’s price to its tangible book value. (Book value is a company’s assets, minus its liabilities; tangible book value also removes intangible assets like the estimated value of a brand name.)
Genworth Financial has a tangible book value of $26.66; the stock trades for about 0.7 times that. Most U.S. life insurers (as well as Genworth MI Canada) currently trade for 1.2 times tangible book value. The gap is a recognition that Genworth Financial is still only partly through its recovery story.
Analyst Jimmy S. Bhullar of J.P. Morgan forecasts double-digit returns on equity in the next year for the majority of the 17 insurers he covers. For Genworth Financial, however, he sees a return on equity of 6.2 per cent, near the bottom of the pack. Still, it is heading in the right direction, with 2013’s fourth quarter marking the seventh consecutive period of year-over-year gains in the measure.
While the company has a near-term target of ROE between 7 per cent and 9 per cent, analyst Sean Dargan of Macquarie Capital Inc. says he doesn’t see those numbers “as the endgame” for the company.
Part of the story is the improving business: Mr. Dargan, who has an “outperform” rating and $20 target price, notes “Genworth executed against virtually all of its 2013 goals and milestones” as set out by management before the year, including boosting surpluses and capital, reducing debt, and generating more premiums. “In any turnaround story, management credibility is important,” he says.
Another part of the story is the shape the corporation might take in the future. The company is mulling an IPO later this year of its Australian business, the other significant component of its international operations, along with Canada. J.P. Morgan’s Mr. Bhullar calls a potential successful Australia IPO “a key catalyst that would significantly bolster capital flexibility and lift sentiment on the stock.” (Mr. Bhullar is neutral on the shares.)
Macquarie’s Mr. Dargan believes Genworth Financial might also split its mortgage operations from its life and long-term care insurance business, which provides almost half the company’s value, he estimates.
Despite Genworth Financial’s progress in addressing the risks in both U.S. mortgage insurance and its long-term care businesses, Mark Palmer of BTIG Research says that “many investors appear to have anchored their perceptions of the stock to a time when the company faced much greater uncertainty than it does currently.”
Mr. Palmer, who has a “buy” rating and $22 target price, believes earnings will “accelerate” in 2014 and the Australian IPO will not only help Genworth Financial pay off debt, but may put it closer to share buybacks and a dividend.
Genworth MI Canada has both buybacks and dividend, in contrast to its parent, making it a classic Canadian income-oriented stock. It also has slowing growth, however. Mr. Dargan’s Canadian counterpart at Macquarie, Asim Imran, expects $3.71 (Canadian) in earnings per share in 2014, up from $3.52 in 2013. With weakness in the Canadian dollar, Genworth MI Canada may end up subtracting from its parent’s earnings in 2014 rather than adding to them.
Still not sold that the way to play Genworth is to head south? Here’s a helpful calculation for the skeptical: Genworth Financial owns more than 54 million shares of Genworth MI Canada. At Friday’s close, the stake was worth around $1.9-billion (U.S.), or $3.86 per Genworth Financial share. That’s about 20 per cent of the company’s market value, purely from Canadian content.
It’s the non-Canadian part of the company, however, that’ll likely provide the next wave of gains.