The mortgage insurance industry is gradually getting into shape after being hit hard by the financial crisis. With steady improvement in housing market fundamentals and improving employment scenario, this industry is poised for long-term growth.
The mortgage insurers have been witnessing lower new delinquencies, declining claims payments while new insurance written have been increasing steadily. With strong credit characteristics of the new loans insured, we expect the companies to see fewer claims than before. The mortgage insurers have also been following stringent underwriting standards to ensure profitability.
Per the Mortgage Bankers Association, mortgage applications increased 9.9% in the first week of September compared with a 3.3% rise in the earlier week. Per a report of the association, this is the biggest gain in mortgage applications since July 2016. Also, applications to purchase a home went up 10.9% and the same for refinance increased 8.9% per the report. This momentum could have continued had two hurricanes not wreaked havoc.
Improvement in economic conditions has been driving a surge in employment. Per Bureau of Labor Statistics, employment increased by 0.2 million in August while unemployment improved to 4.4%.
However, the mortgage insurance market is highly competitive with a few players capturing a large market share. Along with private players, the company also faces stiff competition from Federal Housing Administration which slashed its annual premium to make loans more affordable.
Mortgage insurers are part of Multiline Insurance industry, currently ranked at #203 (lies in the upper half of the Zacks Industry Rank for 252 plus industries). It has outperformed the S&P 500 in a year by registering a rally of 28.9%. The index on the other hand climbed 16.9%.
Here we focus on two mortgage insurers. Radian Group Inc. (RDN - Free Report) is a credit enhancement company which supports homebuyers, mortgage lenders, loan servicers and investors with a suite of private mortgage insurance and related risk-management products and services. While MGIC Investment Corp. (MTG - Free Report) provides primary insurance to cushion lenders against non-payment of individual loans and expands home ownership opportunities by enabling people to purchase homes with slimmer down payments. While Radian Group has a market capitalization of $3.7 billion, MGIC Investment has $4.3 billion of the same.
It will be interesting to note which stock is better positioned in terms of fundamentals.
Some better-ranked stocks from the industry are Kemper Corp. (KMPR - Free Report) , flaunting a Zacks Rank #1 (Strong Buy) and CNO Financial Group, Inc. (CNO - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1Rank stocks here.
While MGIC Investment has a Zacks Rank #2 (Buy), Radian Group carries a Zacks Rank #3 (Hold). MGIC Investment has an edge over Radian Group, thus winning the round with conviction.
Both MGIC Investment and Radian Group have outperformed the industry in a year’s time. Shares of Radian Group have gained 29.2% while that of MGIC Investment has rallied 45.5%. Here, MGIC Investment performs better than Radian Group .
The price-to-book value metric is the best multiple used for valuing securities exchange. Compared with the industry’s P/B ratio of 1.36, Radian Group is underpriced with a reading of 1.28. While MGIC Investment’s trailing 12-month P/B multiple is 1.44. This round clearly goes to Radian Group as the company’s shares are cheaper than MGIC Investment’s.
Radian Group carries a VGM Score of A while MGIC Investment has a VGM Score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three factors. This round understandably goes to Radian Group.
Both MGIC Investment and Radian Group have lower debt-to-equity ratio compared with the industry average of 47.6. MGIC Investment with a leverage ratio of 27.7 has an edge over Radian Group with the same of 33.9.
Return-on-equity for MGIC Investment is 16.6% and Radian Group is 12.8%, both outperforming the industry average of 7.7%. Comparatively, MGIC Investment has an edge over Radian Group.
MGIC Investment’s risk-to-capital ratio was 10.2:1 as of Jun 30, 2017 while that of Radian Group is 13.4:1. MGIC Investment wins this round hands down.
Earnings Surprise History
With regard to the companies’ surprise history, MGIC Investment has surpassed the Zacks Consensus Estimate in the last four quarters with an average beat of 31.88%. Whereas, Radian Group has delivered positive surprises in three of the last four quarters with a four-quarter average beat of 3.42%.
Hence, MGIC Investment’s has an edge over Radian Group in this context.
Earnings Estimate Revisions and Growth Projections
MGIC Investment’s 2017 estimates have increased 7.6% but had no movement for 2018 in the last 60 days. On the other hand, Radian Group’s 2017 estimates have moved up 6.2% and 1.1% for 2018 over the same time frame.
For MGIC Investment, the Zacks Consensus Estimate for earnings per share is $1.13 for 2017, reflecting a year-over-year rally of 14.1%. For 2018, the Zacks Consensus Estimate for earnings per share is pegged at $1.12, representing a year-over-year decline of 0.6%. MGIC Investment has long-term expected earnings per share growth of 5%.
For Radian Group, the Zacks Consensus Estimate for earnings per share is $1.72 for 2017, reflecting a year-over-year increase of 10.5%. For 2018, the Zacks Consensus Estimate for earnings per share is pegged at $1.89, representing a year-over-year rise of 9.7%. Radian Group has long-term expected earnings per share growth of 5%.
This round therefore goes to Radian Group right away.
MGIC Investment holds an edge over Radian Group on the basis of price performance. Zacks Rank, surprise history, return-on-equity, risk-to-capital ratio and leverage. Considering parameters of valuation, growth projections and VGM Score, Radian Group seems better-poised than MGIC Investment. However, based on our comparative analysis, MGIC Investment presently has an advantage over Radian Group.
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