Analysts are turning overwhelmingly bullish on Manulife Financial Corp. amid a brightening economic backdrop and the company’s improving financial performance. Is the stock at last regaining the lustre it lost nearly a decade ago?
At the start of 2018, two-thirds of analysts covering the insurer recommended the stock as a buying opportunity – a lukewarm endorsement in terms of Street consensus.
But the level of enthusiasm has since jumped to more than 82 per cent. According to Bloomberg, 14 out of 17 analysts following the stock now recommend it as a buy, following recent upgrades from CIBC World Markets, TD Securities and National Bank Financial.
While the ratio of buy recommendations is not at record levels, the improvement marks a significant upturn in opinion for a company that has fallen out of favour with investors since the financial crisis in 2008.
The share price fell 77 per cent from the start of 2008 to the bear-market low in March, 2009, reflecting how closely Manulife’s financial health was tied to the performance of the equity market. Manulife also slashed its dividend during this grim period and had to bolster capital levels by issuing 190 million additional shares, turning a blue-chip stock into a floundering mess.
Despite a significant recovery since 2009, the share price is 45-per-cent below its record high in 2007. But the fact that analysts are sounding increasingly optimistic today suggests that the stock could be at a turning point.
Manulife CEO Roy Gori.Christopher Katsarov/The Globe and Mail
The newfound bullishness among analysts rests on four pillars.
One, profit expectations are rising with strong global economic activity and rising bond yields. Last week, the insurer reported a net profit of nearly $1.4-billion in the first quarter, up nearly 2 per cent from last year. After adjustments, profit beat analysts’ expectations, driven by double-digit growth in asset management and insurance operations in Asia and Canada.
Paul Holden, an analyst at CIBC World Markets who last week raised his recommendation on Manulife to “outperformer” from “neutral,” is now expecting “core” profit will rise by 18.5 per cent in 2018 – in line with its peers – driven by improving confidence in insurance operations but also ambitious cost-cutting.
Two, Manulife has demonstrated that it is less vulnerable to market volatility than it used to be. The S&P 500 fell more than 10 per cent between January and February, and the CBOE Volatility Index (or VIX) shot higher to reflect investor anxiety.
Manulife’s share price fell about 16 per cent between January and April as investors bet that its quarterly profit and asset management flows would be hurt.
But they weren’t. As Mr. Holden noted: “Manulife blew through the first quarter like VIX never changed.”
Three, the new life insurance capital adequacy test (LICAT), imposed by regulators at the start of this year to ensure life insurers can survive an economic downturn, is no longer a nagging unknown: Analysts noted that Manulife has surpassed the minimum capital threshold, with enough room to handle financial setbacks arising from, say, a flatter yield curve.
Of course, the bullish enthusiasm among analysts comes with a downside: If the stock is reflecting lofty expectations, will disappointment follow?
To be sure, embracing stocks with a disproportionate number of “buy” calls from analysts can lead you into unsustainable trends or stocks that are priced for perfection. But this leads to the fourth pillar: Manulife is cheap, which provides downside protection and plenty of upside potential if things go right.
The shares trade at just 10.7 times trailing earnings per share, according to Bloomberg, which is well below the stock’s 10-year median price-to-earnings ratio of more than 14.
The P/E ratio based on estimated profit is also attractive. RBC Dominion Securities noted that the shares trade at 9.2 times its estimates for 2018, below the 10-year average of 10.7. That’s also a lower valuation than Manulife’s life insurance peers and the Big Six banks.
Some analysts note that if the valuation rises to the historical average, as investors gain greater confidence in Manulife, then the share price will rally between $28 and $32 – implying gains of 15 to 30 per cent from the current price of $24.49.
This is an unloved stock finally receiving some affection.