Book value is one of the most reliable price-analysis metrics used in value investing. The idea is that book value -- the value of a company's assets minus all debt and liabilities -- provides a floor for a company's share price.
So when a company as large as
, $13 billion-plus insurer and retirement investment provider, falls down below its book value, the market takes notice.
The stock closed Monday at $30.46, up almost 15% from its lows set earlier in the month and just slightly above its book value at the end of the second quarter of $29.30.
Genworth has temporarily moved back above its book value but is still down about 10% year to date. With that in mind, I'm here to answer readers' questions: Should you buy shares in Genworth? Is the stock attractive to buy down around its book value, or will the insurer continue to suffer from the current credit crunch.
The company was carved out of
in 2004, and the recent weakness in Genworth shares is a result of its exposure to the subprime mortgage conundrum.
In addition to its mortgage insurance business, which accounts for about 20% of total earnings, Genworth also said Aug. 15 that it has $3.7 billion of collateralized debt holdings, backed by Alt-A and subprime mortgages.
This is just 5% of the company's invested assets, though management said that losses would be limited to $110 million to $195 million, under a worst-case scenario.
If that's the only risk the company's book value faces, then maybe the downside in Genworth shares could be contained near current levels. In fact, board director James Parke stepped in and bought 10,000 shares of the company on the market earlier in the month, when the stock was trading in the high-$20s.
But looking at Genworth's balance sheet, it's also worth noting that the company has $2.45 billion of goodwill and intangible assets, including acquisition premium costs and capitalized software. A truer look at book value would be the insurer's tangible book, which is down around $23.75 a share, excluding these "soft assets."
Even if Genworth's book value doesn't lend as much support to the stock as the bulls would hope, the company also currently looks inexpensive on a price-to-earnings basis.
At current levels, the stock trades at just 9.5 times expected 2007 earnings of $3.17. This is an 8% discount to its peers, but given the company's near-term profit expectations, this likely will prove optimistic based on Genworth's dependence on mortgage insurance.
Based on the company's double-whammy exposure to subprime mortgage risk, I believe that readers should hold off from buying Genworth shares at current levels. The book value is not lending as much support as it may appear, and the stock is likely to revisit its recent lows in the coming months.
David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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