MANULIFE FINANCIAL CORP FACES MORE CHALLENGES

The collapse in oil prices has already taken a toll on Manulife Financial Corp., but one analyst is warning that more pain may be coming and analysts’ fourth-quarter earnings estimates don’t appear achievable.

Gabriel Dechaine at Canaccord Genuity noted that Manulife recorded zero investment gains in 2015, compared to its target of $100 million after tax per quarter. Weak oil prices also resulted in $600-million worth of mark-to-market losses on a portfolio that stood at $1.9 billion in the third quarter of 2015.

The company relies on a third party to evaluate its oil and gas portfolio, and this appraisal is not public, but Manulife has disclosed that it tracks both forward and consensus price curves on a lagged basis.

As a result, Dechaine expects the 19-per-cent decline in oil prices since the end of Q3 to lead to another mark-to-market loss, potentially in the range of $200 million, with Manulife’s Q4 results. His Q4 EPS forecast stands at 44 cents, compared to an average of 47 cents for other analysts — presumably due to anticipated investment gains in the coming quarter.

“We admit that even our forecast feels optimistic at this point,” Dechaine said, pointing to the recent slide in crude, and the need for Manulife to make up for $169 million in negative investments through the first nine months of the year in order to break even.

New business gains could serve as an offset, but the analyst is confident the upcoming quarter will be weak. Manulife reports results on Feb. 11, 2016.

But with the stock trading near $ 20 per share, some might be tempted to jump in and buy on the low. History seems to suggest this is a good approach, since Manulife has traded below $20 six times in the past two years, and the stock rose an average of nine per cent in the following three months.

However, Dechaine noted that Manulife’s forward P/E multiple of 10x implies a 2016 EPS growth forecast of 18 per cent. He thinks this may be overly optimistic due to weak equity markets and the negative impact they will have on Manulife’s wealth management business, the possibility of oil-related losses, uncertainty about how much of Manulife’s cost reductions will flow to the bottom line, and. of course, low interest rates, particularly in Canada.