Why Genworth Is Poised to Keep Running

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 (NYSE: GNW  ) 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:

  1. 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.
  2. Expense reductions tied to the elimination of 400 positions announced last June.
  3. The benefit-to-earnings from rate increases Genworth has implemented and will be able to continue to implement.
  4. 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. 

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