MGIC Investment has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 13.7% to $31.00 per share while the index has gained 11.8%.
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Why Do We Think MGIC Investment Will Underperform?
We don’t have much confidence in MGIC Investment. Here are three reasons why MTG doesn’t excite us, plus one stock we’d rather own.
1. Declining Net Premiums Earned Reflect Weakness
Net premiums earned are net of what’s paid to reinsurers (insurance for insurance companies), which are used by insurers to protect themselves from large losses.
MGIC Investment’s net premiums earned has declined by 1.5% annually over the last five years, much worse than the broader insurance industry. This shows that policy underwriting underperformed its other business lines.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect MGIC Investment’s revenue to stall, close to its flat result for the past two years. This projection doesn’t excite us and implies its newer products and services will not lead to better top-line performance yet.
3. Recent EPS Growth Below Our Standards
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
MGIC Investment’s EPS grew at a weak 8.4% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its flat revenue and tells us management responded to softer demand by adapting its cost structure.
Final Judgment
MGIC Investment falls short of our quality standards. That said, the stock currently trades at 1.2× forward P/B (or $31.00 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of MGIC Investment
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