Recent performance snapshot
Genworth Financial (GNW) has drawn attention after recent trading, with the share price at $8.05 and a market cap of about $3.1 billion. This has prompted investors to reassess its returns and fundamentals.
See our latest analysis for Genworth Financial.
Recent trading has been softer, with a 30 day share price return of a 4.62% decline and a 90 day share price return of an 11.54% decline. However, longer term total shareholder returns of 13.54% over one year and 131.32% over five years suggest momentum has been stronger over multi year horizons.
If you are comparing Genworth with other ideas in the market, it can help to widen the search and review the 20 top founder-led companies
With Genworth trading at $8.05 against an analyst price target of $10.50 and an indicated intrinsic value premium, the key question is whether the stock is undervalued today or if the market is already pricing in future growth.
Price to earnings of 14.1x: Is it justified?
Genworth trades on a P/E of 14.1x, which sits below the broader US market P/E of 18.2x but above both the US insurance industry average of 10.9x and the peer group average of 11.6x.
The P/E multiple compares the current share price to the company’s earnings, so it effectively shows how many dollars investors are paying for each dollar of earnings. For an insurer like Genworth, this is often used as a quick way to weigh earnings power against other listed insurers and the wider market.
Here, the mixed signals stand out. On one side, Genworth looks cheaper than the US market at 18.2x, which suggests investors are paying less per dollar of earnings than they would for the average US stock. On the other side, the 14.1x P/E sits above the insurance industry at 10.9x and above peers at 11.6x, even though earnings have declined by 35.3% per year over the past five years and fell 28.2% over the last year, with net profit margins at 3% compared with 4.2% a year earlier.
This higher than peer and higher than industry multiple means buyers today are accepting a richer earnings tag than the sector averages, despite weaker historical profit trends and a low current return on equity of 3.6%. If the market were to move closer to sector levels, that would imply a lower P/E than 14.1x. Any outperformance relative to peers would need to be supported by future earnings that are not currently backed by the available forecasts.
See what the numbers say about this price — find out in our valuation breakdown.
Result: Price-to-earnings of 14.1x (OVERVALUED)
How the discounted cash flow view compares
The SWS DCF model currently estimates a future cash flow value for Genworth of $2.21 per share, compared with the last close of $8.05, which implies the shares are trading well above that modelled value.
The DCF approach projects future cash flows and discounts them back to today using a required rate of return, giving a single estimate of what those cash flows might be worth in present dollar terms. It is sensitive to assumptions around future profitability and cash generation, and it can sit quite far from market prices when there is uncertainty or limited visibility over those inputs.
For Genworth, earnings have declined over the past five years and the most recent year, net profit margins have slipped from 4.2% to 3%, and return on equity is low at 3.6%, with forecasts pointing to a still low 1.6% in three years. Those trends feed directly into a lower stream of projected future cash flows in the model, which helps explain why the DCF output of $2.21 sits below both the current price of $8.05 and the analyst target of $10.50.
Look into how the SWS DCF model arrives at its fair value.
Result: DCF fair value of $2.21 (OVERVALUED)
However, the long term care and mortgage insurance exposure, combined with earnings that have declined and a low 3.6% return on equity, could quickly challenge this valuation story.
Find out about the key risks to this Genworth Financial narrative.
Another way to look at value
While the P/E suggests Genworth is priced richer than insurance peers, the SWS DCF model points to a different picture. With a future cash flow value estimate of $2.21 per share against the $8.05 price, it flags the stock as overvalued. This raises the question of which signal should carry more weight for you.
Look into how the SWS DCF model arrives at its fair value.
Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Genworth Financial for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 62 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.
Next Steps
The mix of signals on valuation and fundamentals can feel conflicting, so it is worth looking through the details yourself and testing different scenarios before deciding what makes sense for your portfolio. To understand both the concerns and the potential upside currently flagged for Genworth, check the 1 key reward and 1 important warning sign
Looking for more investment ideas?
If Genworth does not fully fit your plans, do not stop here. There are other stocks that may better match the return and risk mix you want.
- Target potential value opportunities beyond Genworth by scanning the 62 high quality undervalued stocks.
- Prioritise stability and financial strength by working through the solid balance sheet and fundamentals stocks screener (39 results).
- Aim to get ahead of the crowd by focusing on the screener containing 25 high quality undiscovered gems.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com