newsletter signup


Smart Investing Newsletter Archive

How long will people collect on long-term care policies?

Tuesday, August 11th, 2015

Last November I wrote about a company called Genworth Financial that declined 38½ percent in one day.

Genworth’s (NYSE: GNW) stock had a 52-week high of $18.50. At the time of that column — Nov. 11, 2014 — the stock was trading about $13 per share.

I explained how the numbers looked extremely good and that the company had a target sell price of $23.25 per share for potential return of about 70 percent.

Then I discovered that the company is having problems with long-term care policies.

The problem is people are living longer and the company’s costs were exceeding its estimates.

The stock is now trading about $5 a share. So would now be a good time to look at this company?

Before investing in any company, you must understand what the business is and how it is doing.

Over the last 12 months there is no price-to-earnings ratio because the company lost $3.31 during that time.

Price to sales does look good for the company at 0.36 — well below the industry at 0.83. Price to tangible book value is very attractive, at 0.23 compared with the industry at 1.63.

The company has no price to cash flow but the industry has a price to cash flow of 4.6.

Sales in the last 12 months have grown at a rate of 1.6 percent, which is far below the industry average of 10.3 percent. The big kicker is earnings per share: Year over year for the past 12 months, they drop by 303 percent when the industry was up 29.3.

I was surprised to learn that 12 months ago the company had $3.5 billion in cash and short-term investments and today that has risen to $4.1 billion. Also surprising is long-term investments have increased from $69.5 billion to the current $70.5 billion.

This is an insurance company, so you would expect long-term investments to be high.

The company has a debt to equity of 44.3, just slightly higher than the industry average of 37.3.

I was curious to find out whether the debt has been substantially higher for the company so I went back to September 2013 and discovered that it has decreased from $7.1 billion down to $6.7 billion.

The unfortunate part, however, is that the equity has decreased over the same period by $1 billion to $13.7 billion.

No surprise that return on equity was a negative 8.3 percent compared with the industry increasing by 10.3 percent.

The same held true when I look at the net profit margin of a negative 11.1 percent, compared with the industry at 6.7 percent.

The company’s cash flow for the first six months from operations was $511 million, not that much different from a year ago when it was $578 million.

For some reason, the company is using its cash to buy back a small amount of shares to the tune of $45 million over the last year. It didn't seem to help that much and the basic shares actually increased by 1 million shares, but there was an effect on the diluted shares falling by about 4 million shares.

The estimated earnings for December 2016 are $1.11, based on the mean estimate of 11 analysts. The high estimate is $1.28 and the low is 96 cents. Using a forward price earnings multiple of 16.5 would yield a target stock price of $18.31.

That number is pretty close to the 52-week high of $18.52 when I wrote about this company in November 2014, so it appears to be a pretty good value.

However, the unknown still remains: how long people who are collecting on long-term care policies will live.

If an investor could dig in and understand how far off the company was on its mortality tables, one may be able to get assess risk because the stock price appears to be a pretty good value at these levels.

Remember, the stock fell from $18 to $5 per share. If the stock were to fall just $2.50 more, that would be a 50 percent drop.

Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!


Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

Do you have a question or a company you would like us to take a look at?
Ask Us!

Upcoming Smart Investing Workshop
Thursday, Dec 7th

Register Now

The Smart Investing Radio Show

with Brent & Chase Wilsey

Saturdays 8am (LIVE)
Sundays 5pm (REPLAY)

Newsletter

Latest Newsletter

Video

Latest Video

Dec 4th, 2017: Brent Wilsey & Roy Robertson discuss how to select a financial adviser you trust and what kind of research you can do to make the most important financial decisions you will ever make.

How to Research Financial Advisors

Dec 6th, 2017

Wilsey Asset Management Inc BBB Business Review