RBC Capital Markets downgraded Manulife Financial Corp. from Outperform to Sector Perform and trimmed its price target on the stock by $2 to $22 on Friday.
Manulife’s fourth quarter earnings per share of 51¢ came in below RBC’s estimate of $1.02 and the Street’s at 69¢.
Analyst Andre-Philippe Hardy also cut his 2010 forecast from $1.85 to $1.40.
“Manulife’s earnings remain most sensitive to movements in interest rates and equity markets,” he told clients.
Mr. Hardy believes that the company’s valuation of 2011 estimated EPS is not low enough relative to bank stocks given Manulife’s higher potential earnings volatility and lower expected return on equity.
He also suggested that consensus earnings estimates need to decline unless interest rates and equity markets both rise materially. If higher long-term rates materialize and if stocks strenghten further, the analyst does believe Manulife shares have the most near-term upside.
“However, outside of a near-term rally that would be driven by those macro factors becoming in favour of Manulife, we foresee more upside in bank stocks and in Sun Life’s shares,” he said.
Mr. Hardy also noted that equity market returns so far in the first quarter suggest a weak outlook for profits in the first three months of 2010. Meanwhile, disclosures around goodwill and potential U.S. tax assessments suggest more potential noise around reported earnings.
Credit Suisse analyst Jim Bantis noted that the earnings shortfall come from lower-than-expected reserve gains from positive equity market performance and higher interest rates.
At year-end, Manulife’s equity exposures were 35% hedged or reinsured, up from 20% at the end of 2008. Subsequent to year-end, the company hedged another $7.6-billion of guarantee value, increasing the hedged or reinsured percentage up to 42%, the analyst noted.
“Substantially all new variable annuity business is hedged,” he said. “We don’t anticipate this coverage to materially exceed 50% as Manulife is mindful of locking out the upside if equity markets continue to normalize.”
Mr. Bantis rates Manulife shares at Neutral with a target price of $19.