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MTG or RDN: Which Stock is Stronger for Mortgage Insurance?

Zacks

An improving US economy is helping all the industries to gradually return to growth trajectory. Notable decline in unemployment, easing of the U.S. dollar, momentum in oil prices, increase in spending and an improving GDP buoy optimism among investors.

Fed officials expect unemployment to decline to 3.9% in 2018. GDP is predicted to grow at 2.5%, reflecting an increase from 2.1%, projected earlier. Inflation rate is estimated at 1.9% in 2018. Also, President Donald Trump’s tax reform policy, an overhaul to tax code after 31 years, lowers the corporate tax burden.

Good news is that the mortgage insurance, which also was hit hard by the financial crisis in 2008 like others, is gradually getting into shape. A steady improvement in the housing market fundamentals and an improving employment scenario are poised for long-term growth.

Per the Mortgage Bankers Association, mortgage applications inched up 0.7% in the last week of December compared with the 4.9% decline in the third week. Also, refinance improved 1.4%, though applications to purchase slipped only 0.1%.

The mortgage insurers have been witnessing lower new delinquencies and declining claims payments. On the other hand, 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.

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 the Multiline Insurance industry, ranked at #102 (lies in the upper half of the Zacks Industry Rank for 265 plus industries). In fact it climbed the ladder from Rank #183 (which falls in the lower half of the Zacks Industry Rank) a week earlier. The Multiline Insurance industry gained 8.5% in a year.

Here we focus on two mortgage insurers, Radian Group Inc. RDN and MGIC Investment Corporation MTG.

Radian Group is a credit enhancement company, supporting homebuyers, mortgage lenders, loan servicers and investors with a suite of private mortgage insurance and related risk-management products and services. While MGIC Investment 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. Also, Radian Group has a market capitalization of $4.5 billion while MGIC Investment has $5.3 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 Cigna Corp. CI and Loews CorporationL, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Zacks Rank

Both MGIC Investment and Radian Group sport a Zacks Rank #1. Thus both fare equally.

Price Performance

Both MGIC Investment and Radian Group have outperformed the industry in a year. While shares of Radian Group have rallied 14.6%, that of MGIC Investment has surged 36.3%. Here, MGIC Investment performs better than Radian Group.



Valuation

The price-to-book value metric is the best multiple used for valuing mortgage insurers. Compared with the industry’s P/B ratio of 1.44, both Radian Group and MGIC Investment are overpriced. Yet with a trailing 12-month P/B multiple of 1.50, Radian Group is relatively cheaper than MGIC Investment’s trailing 12-month P/B multiple of 1.69. This round clearly goes to Radian Group.



VGM Score

While Radian Group carries a VGM Score of B, MGIC Investment has a VGM Score of C. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of all three factors. This round undoubtedly goes to Radian Group again.

Debt-to-Equity

Both MGIC Investment and Radian Group have lower debt-to-equity ratio compared with the industry average of 45.9. MGIC Investment with a leverage ratio of 26.5 has an edge over Radian Group with the same of 34.4.



Return-on-Equity

Return-on-equity for MGIC Investment is 16.4% and Radian Group is 13%, both outperforming the industry average of 7%. Comparatively, MGIC Investment has an edge over Radian Group here.




Risk-to-Capital Ratio

MGIC Investment’s risk-to-capital ratio was 10.1:1 as of Sep 30, 2017 while that of Radian Group was 13.4:1. MGIC Investment wins this round hands down.

Earnings Surprise History

Per the companies’ surprise history, MGIC Investment has surpassed the Zacks Consensus Estimate in all the last four quarters with an average beat of 27.11%. Whereas, Radian Group has delivered positive surprises in three of the trailing four quarters with an average four-quarter beat of 4.52%.

Hence, MGIC Investment scores over Radian Group in this context.

Earnings Estimate Revisions and Growth Projections

MGIC Investment’s 2018 estimates have been raised 5.9% in the last 60 days. While Radian Group stock has seen the Zacks Consensus Estimate for 2018 earnings being moved 5.2% north over the same time frame.

For MGIC Investment, the consensus mark for earnings per share is pegged at $1.26 for 2018, representing year-over-year growth of 3.9%. The stock has long-term expected earnings per share growth of 8.5%.

For Radian Group, the Zacks Consensus Estimate for earnings per share stands at $2.03 for 2018, reflecting a year-over-year increase of 15.4%. The stock has long-term expected earnings per share growth of 5%.

This round therefore goes to MGIC Investment right away.

To Conclude

MGIC Investment holds an edge over Radian Group on the basis of rank, growth projections, surprise history, return-on-equity, risk-to-capital ratio and leverage. Considering parameters of valuation 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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