Analyst: CNO Financial Is Stuck Dealing With A 'Problematic Product Class'

With several years of lackluster growth behind it, investors should no longer be surprised by disappointing performance from CNO Financial Group Inc CNO, according to Morgan Stanley.

The Analyst

Morgan Stanley analyst Nigel Dally upgraded CNO from Underweight to Equal-Weight, but cut his price target from $23 to $22.

The Thesis

CNO Financial stock is down 18.4 percent this year and is underperforming its peer by 10 percent, bringing the price to a level reflective of Dally’s valuation.

Dally’s concerns are persistent though. In particular, too much exposure to long-term care insurance (a "problematic product class") prevent including a consolidation premium into the valuation.

“We do not expect the company to be successful in its plan to reduce long-term care exposure by 50 percent over the next 5 years,” said Dally in a note.

On a more positive note, the risk of large charges has been limited by a smaller number of lifetime guarantees and an aging average age of its block.

The company also has a strong free cash flow, which will enable management to drive “reasonable EPS growth” despite struggling sales.

The analyst’s bull and bear case scenarios for the stock are $29 and $15, respectively. Both of which will be driven in part by risks associated with long-term care.

Price Action

Shares of CNO traded around $20.31 Tursday afternoon.

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