Phoenix Companies in Turnaround

Fourth quarter '07 operating results of The Phoenix Companies, Inc. (PNX - Snapshot Report) were below our expectations. Net income reported a significant decline primarily due to impairment charges and the sale of EMCO, its Argentine subsidiary.

By continuing its focus on enhancing its distribution for life and annuity products while curtailing its expense base, PNX remains a turnaround story, in our opinion. While PNX has experienced ROE improvement, the level remains significantly below its peers. The current credit environment and economic slowdown will weigh on the company and the industry as well.

We have adjusted our 2008 earnings expectation to $1.15 per share from $1.20 per share to reflect 4Q07 results and generally expected trends for this company. In addition, we have installed our early 2009 earnings expectation at $1.30 per share. Phoenix's shares currently trade 0.49x its 4Q07 book value (excl. AOCI) of $21.71 per share and 0.53x reported book value of $19.99 per share.

Even though the ROE has improved in recent quarters it is still less than half the median level of its peer group. As a result, the current price-to-book multiple is less than half of the median level of its peer group.

We believe the current valuation for PNX is justified, given the company's profit margins and ROE, and considering the current price to our 2007E EPS. Our new six-month price target of $11.50 per share, down from $12.40 per share, incorporates a price-to-book multiple of 0.55x (down from 0.60x previously) to our June 30, 2008 book value $20.65 per share.

At this point in time, we suspect a takeover announcement would be the only way for the shares of this company to trade close to a 1x book value. Thus, we maintain our Hold recommendation on the shares of this company.

Read the full analyst report on PNX.

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