Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – May 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Genworth Financial (GNW) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Genworth Financial, Inc. (Genworth) is a financial security company. The Company provides insurance, wealth management, investment and financial solutions. As of December 31, 2011, the Company had more than 15 million customers, with a presence in more than 25 countries. The Company operates in Insurance, Mortgage Insurance and Corporate and Runoff. The Mortgage Insurance Division includes the business segments, such as International Mortgage Insurance and U.S. Mortgage Insurance. The Corporate and Runoff Division includes the Runoff segment and Corporate and Other activities. In September 2013, Genworth Financial, Inc closed the sale of its Wealth Management business, including Genworth Financial Wealth Management and alternative solutions provider, the Altegris companies, to a partnership of Aquiline Capital Partners and Genstar Capital.
Defensive Investor – must pass all 6 of the following tests: Score = 1/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 1/3
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
As this stock analysis shows, Genworth Financial is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, the lack of dividends and the poor PEmg and PB ratios. The Enterprising Investor is concerned with the lack of dividends and lack of earnings stability over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) grow from a loss of $0.14 in 2011 to an estimated loss of $0.04 for 2015. While the earnings situation has slightly improved, the company still is losing money, which is a result all value investors should strive to avoid. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value well below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Genworth Financial (GNW)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.