Is Manulife Financial Stock Oversold At $14?

After a 54% rally off the March bottom, Manulife Financial’s stock (NYSE: MFC) seems to still have some room to grow based on its historic PE multiples. Manulife Financial’s stock has rallied from $9 to $14 off the recent bottom compared to the S&P 500 which increased 43%. The insurance giant is beating the overall markets as the investor outlook toward the insurance industry, in general, has turned somewhat positive due to government stimulus and net market gains.

MFC’s stock has partially reached the level it was at before the drop in February, due to the coronavirus outbreak becoming a pandemic. However, the stock is still 32% below the levels seen in late 2019. After the healthy rise since the March 23 lows, we feel that the company’s stock still has some potential as its historic PE multiples imply it can still grow further. 

Some of the 30% rise of the last 3 years is justified by the roughly 51% growth seen in Manulife Financial’s revenues from 2016 to 2019, which translated into a 94% jump in Net Income. The net income figure was strengthened by higher growth in revenues as compared to expenses (46%). Further, the expense figure fell in terms of % of revenues, mainly due to lower net claims, general expense, and commissions, enabling the net income margins to improve from 5.3% to 6.8% over the same period. Notably, the net income margin was significantly higher in 2018, mainly due to lower insurance contract liabilities.

While the company has seen steady revenue and earnings growth over recent years, its PE multiple has seen some decline. We believe the stock is likely to see some upside beyond the recent rally and despite the potential weakness from a recession driven by the Covid outbreak. Our dashboard Why Manulife Financial Stock moved 30% between 2016 and 2019 has the underlying numbers.

Manulife Financial’s PE multiple changed from around 14.5x in 2016 to 9.5x at the end of 2019. While the company’s PE is down to 6.5x now, there is some upside potential when the current PE is compared to levels seen in the past years – PE of 9.5x at the end of 2019 and 7.5x as recent as late 2018.

So what’s the likely trigger and timing for further upside?

The current coronavirus crisis could lead to lower insurance premiums for the company as business and individuals would be more focused on the short term. Further, the company could also face a significant increase in insurance claims, especially in the health insurance segment. Like its peers, Manulife Financial is also heavily dependent on income from investment of insurance premiums for its profitability, which is going to suffer due to lower asset valuations driven by the economic slowdown. Notably, the recent improvement in the securities market has given some hope to this revenue stream. While the Q1 results were on similar lines, we believe the company’s results for Q2 will further confirm this reality with a drop in revenues across all the segments. A lower Q3 as-well-as 2020 guidance is also likely.

However, following the Fed stimulus — which helped to calm investors’ fear — the market has been willing to “look through” the current weak period and take a longer-term view — where current valuations vs historic valuations become important in finding value.

That said, if there isn’t clear evidence of containment of the virus over the next couple of months, or if there is a second wave of infections in the country, the stock could potentially see another dip. Under such a scenario, the P/E multiple could decline even as the earnings forecast for the current year is revised lower again.

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. It complements our analyses of Coronavirus impact on a diverse set of Manulife Financial’s peers. The complete set of coronavirus impact and timing analyses is available here.

While Manulife Financial stock has some growth potential, there can be an even bigger opportunity when you compare Discover Financial with Mastercard.

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