MBIA Inc (MBI)

[Enterprising Investor]

MBIA Stock Could Reach $12 (5/11/16)

Shares of the financial services firm may be trading far below value even if new business remains difficult.

MBIA (MBI: NYSE)
By MKM Partners ($7.53, May 10, 2016)

We continue to believe the shares of MBIA trade far below its economic value and maintain our Buy recommendation with a $12 price target, based on a multiple of roughly 0.4 times our 2017 adjusted book-value-per-share estimate.

MBIA (ticker: MBI ) reported 2016 first-quarter operating earnings of 12 cents per share, essentially in line with our estimate of 13 cents, and higher than the consensus estimate of nine cents. Adjusted book value (ABV) per share was $31.74 as of March 31, up from $25.78 in the year-ago period, and up from $29.69 as of Dec. 31. We believe ABV is the best way to value a financial guarantor over time.

New business remains difficult for the industry and MBIA given the current low-level interest rates and spreads. The company recorded net premiums written of $1.3 million for the quarter, well short of $26 million of scheduled earned premiums that it needs to stay even. Anything less will generate excess capital as the business runs off. [Subsidiary] National Public Finance has strengthened its marketing efforts over the past year, but it will take time for it to regain the market receptivity that it once enjoyed.

National Public Finance reported incurred losses of $9 million, up from a benefit of $6 million in the year-ago quarter due to the increase in loss reserves for certain Puerto Rico credits. The financial guarantors all use a probabilistic model in arriving at loss reserves. An outsider cannot fully evaluate the assumptions behind the models, but we suspect the models are similar with respect to potential up-front losses, but likely differ on potential recoveries.

The corporate segment reported an operating loss of $21 million in the first quarter compared with an operating loss of $22 million a year ago. While the operating loss was comparable to last year’s level, the segment can see significant volatility due to mark-to-market and foreign-exchange gains/losses that are removed from our review. This quarter saw a $60 million negative swing from foreign exchange and an $18 million negative swing from mark-to-market changes. However, as these notes are mostly long dated, the near term volatility may not have much real impact. The company only has $123 million of these notes maturing in 2016 and $49 million in 2017.

During the first quarter, the company repurchased 15 million common shares at an average price of $6.30 each. It likely repurchased more shares than planned early in the quarter when its share price dipped. As of May 5, there was $100 million of remaining authorized capacity under the company’s current share-repurchase program.

We are adjusting our 2016 earnings-per-share estimate down to 50 cents from 55 cents, and down to 55 cents from 60 cents for 2017. While we tinkered with a number of items, the chief reason for the revision is a higher expense ratio due to the company bringing in more new business people. While the numbers of new hires are small, it still raises expenses.

-- Harry Fong

http://www.barrons.com/articles/mbia-stock-could-reach-12-1462962403