Is Genworth Financial Likely to Outperform?

With shares of Genworth Financial Inc. (NYSE:GNW) trading at around $8.90, is GNW an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The long-term care insurance business is the crux of the story here. In Q4, profits were $7 million, which was a big drop from $28 million for the same quarter a year ago. It turns out that long-term care policies were more costly than Genworth Financial had anticipated.

For Q4, EPS came in at $0.34, which was a 55 percent increase year-over-year. However, revenue came in at $2.54 billion, which was a 2.38 percent decrease year-over-year. Investors tend to look at revenue first. FY2012 EPS came in at $0.65 compared to $0.25 for FY2011. FY2012 revenue was $10.02 billion compared to $10.34 billion for FY2011.

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There were several insider purchases made in May of 2011, which proved to be good decisions. However, that kind of conviction hasn’t been seen as of late. Margins and cash flow are sub-par, but valuation looks good with a Forward P/E of 7.06.

Let’s take a lot at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Genworth Financial is normal. However, the balance sheet is in negative territory.

Debt-To-Equity

Cash

Long-Term Debt

GNW

0.55

$5.82 Billion

$9.76 Billion

SFG

0.25

$160.70 Million

$552.40 Million

MFC

0.64

$26.63 Billion

$16.26 Billion

 

T = Technicals on the Stock Chart Are Mixed     

Genworth has performed well over the past three months. Otherwise, it has been a dog. For a three-year time frame, it has underperformed the S&P 500 as well as StanCorp Financial Group Inc. (NYSE:SFG) and Manulife Financial Corporation (NYSE:MFC). It should also be noted that Genworth Financial is the only company of the three that doesn’t offer dividend yield. StanCorp Financial Group currently yields 2.40 percent, and Manulife Financial currently yields 3.60 percent.

1 Month

Year-To-Date

1 Year

3 Year

GNW

7.61%

18.64%

-0.34%

-35.67%

SFG

0.63%

4.80%

-0.64%

3.29%

MFC

1.97%

6.55%

17.72%

-19.33%

 

At $8.90, Genworth Financial is currently trading above all its averages.

50-Day SMA

7.65

100-Day SMA

6.62

200-Day SMA

5.96

 

E = Earnings Have Been Improving           

Earnings have been improving consistently on an annual basis since 2008. Revenue had been improving consistently on an annual basis since 2009, but that trend came to a halt in 2012.

2008

2009

2010

2011

2012

Revenue ($)in billions

9.95

9.07

10.09

10.34

10.02

Diluted EPS ($)

-1.32

-1.02

0.29

0.25

0.65

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in billions

2.60

2.43

2.52

2.54

2.54

Diluted EPS ($)

0.44

0.09

0.16

0.07

0.34

 

T = Trends Might Support the Industry

The bad news is the cost of long-term policies and low interest rates. The good news is that the United States mortgage insurance business continues to improve.

Conclusion

Genworth Financial is a well-run company, but it can’t dictate exterior circumstances. Twenty-twelve was the first year the company saw a decline in revenue growth in several years. In addition to that, cash flow and margins are average at their best, and for the most part, the stock has performed poorly in a strong market. There aren’t enough positive catalysts with this story at the moment.

Genworth Financial is a STAY AWAY.

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