While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Genworth Financial (GNW -1.17%) climbed 2% this morning after BTIG upgraded the financial services company from neutral to buy.
So what: Along with the upgrade, analyst Mark Palmer planted a price target of $17.50 on the stock, representing about 38% worth of upside to yesterday's close. While value investors might be turned off by the stock's red-hot rally in 2013, Palmer thinks Genworth's accelerating earnings growth still isn't fully reflected in the valuation.
Now what: Palmer, who sees Genworth earning $1.62 per share in 2014 versus the consensus of just $1.43, is looking closely at four key profit drivers:
- Genworth's U.S. mortgage insurance unit needs to increase its contribution, possibly by $100 million. The move would be driven by a continued change in business mix and the uplift associated with an improving U.S. housing market.
- Expense reductions tied to the elimination of 400 positions announced last June.
- The benefit-to-earnings from rate increases Genworth has implemented and will be able to continue to implement.
- Retirement of $500 million in 5.75% senior unsecured notes due 2014, which should provide about $28 million in interest cost savings.
With Genworth shares up 150% over its 52-week lows and trading at a P/E of 14, however, the valuation doesn't seem to offer a wide margin of safety if any one of those issues doesn't progress as BTIG expects.