Manulife Financial Stock Has A 40% Upside

We believe that Manulife Financial stock (NYSE: MFC) has an upside potential of 42% post-pandemic as the lower interest rate environment improves and GDP sees some recovery. MFC trades at $14 currently and it has lost 31% in value year-to-date. It traded at a pre-Covid high of $20 in February and is 29% below that level now. Also, MFC stock has gained 58% from the lows of $9 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is in sync with the broader markets (S&P 500 is up about 55%), as the investor outlook toward the insurance industry, in general, has turned somewhat positive due to government stimulus and net market gains. Further, investors are hopeful of improvement in interest yields and GDP growth in the near term, leading to growth in total premiums and net investment income. Despite the strong rally in MFC stock since late March, we believe that the stock has room for growth in the near future. Our conclusion is based on our detailed analysis of Manulife Financial’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 54% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how MFC and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

Manulife Financial vs S&P 500 Performance Over 2007-08 Financial Crisis

MFC stock declined from levels of around $42 in October 2007 (the pre-crisis peak) to roughly $10 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 76% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.

However, MFC recovered strongly post the 2008 crisis to about $18 in early 2010 – rising by 81% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

Manulife Financial’s Fundamentals in Recent Years Look Strong

Manulife Financial revenues saw a rise of 49% from $40.3 billion in 2016 to $60 billion in 2019, mainly driven by growth in Asia insurance business and income from investment of insurance premiums. Further, the company’s net income increased from $2.1 billion to $4.1 billion, resulting in an EPS jump from $1.07 in 2016 to $2.09 in 2019. Further, the company’s Q2 2020 revenues were 24% more than the year-ago period, however, the net income figure for the quarter decreased by 52% mainly due to a 67% increase in insurance contract liabilities.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10 and in view of the improvement in Manulife Financial’s stock since late March, this suggests a potential recovery to around $20 (42% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $20 level Manulife Financial’s stock was at before the coronavirus outbreak gained global momentum.

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