UPDATE: Genworth (GNW) Assets Sales Will Lead to Significant Earnings Dilution, Morgan Stanley Downgrades to Underweight

Genworth Financial (NYSE: GNW) declined Tuesday after Morgan Stanley downgraded the stock from Equalweight to Underweight with a price target of $8.00. Analyst Nigel Dally thinks efforts to right-size its debt burden will likely come at the cost of significant earnings dilution. The also thinks the stock's valuation is full.

Dally explained, "Following better-than-expected 1Q results, Genworth's stock has surged higher and is now one of the best performing stocks in our coverage universe year-to-date. In our view, this is not warranted by any improvement in the fundamental outlook. Rather, we see the company selling a sizable portion of its assets to reduce debt and fill the capital need for private mortgage insurer eligibility requirements (PMIERs). In tandem with these sales, we expect substantial EPS dilution, which we feel some investors may be overlooking. Further, with our $8 PT (down $0.50 from $8.50) well below the current stock price, we are moving our rating on the stock to Underweight."

"We are cutting our 2016 EPS estimate by $0.35 to $0.80, a reduction of 30%, to reflect the earnings dilution from asset sales. If Genworth were to sell all of its Australian operations, the level of dilution would climb to 45%, with the lost earnings significantly overwhelming the interest saved on debt being retired," added the analyst.

For an analyst ratings summary and ratings history on Genworth Financial click here. For more ratings news on Genworth Financial click here.

Shares of Genworth Financial closed at $9.15 yesterday.

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