Following two quarters of heavy losses, MBIA Inc. (MBI) posted positive results for 2Q08 driven by $3.3 billion in pretax unrealized gains on insured credit derivatives.
However, ratings downgrades by Standard & Poor's and Moody's should impact MBI's asset management business and its ability to write new insurance business. We believe that resumption of share repurchase program, suspended a year ago, will provide some support to the shares. But until the global credit markets stabilize, we expect continued whipsawing of the financial markets for the rest of 2008, and perhaps into 2009.
Based on 2Q08 results, we adjusted our 2008 earnings expectation to a loss of $1.25 per share from a loss of profit of $2.00 per share, but maintained our aggressive 2009 earnings expectation at $1.80 per share. Our current expectations incorporate a greater potential for issues that may arise over the next several quarters with respect to the deterioration in subprime mortgages, which could migrate upstream.
Shares of MBI are 0.51x its 2Q08 book value of $16.67 per share and 0.21x its 2Q08 adjusted book value of $39.63 per share (a blended 0.36x price-to-book multiple), which remains substantially below the company's historical averages of 1.2x and 1.6x, respectively. However, we believe these below-average valuations are warranted as the bond insurance market proceeds further into what we believe will be a cyclical slowdown at best.
Our six-month price target of $7.70 per share, down from $8.10 per share, reflects a 0.45x multiple to our book value estimate of $17.00 per share at December 30, 2008. While the shares have rallied as of late, we still think there is substantial digestion of subprime concerns. As a result, we are maintaining our Sell recommendation on the shares of MBI.
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