Over the past six months, MGIC Investment’s stock price fell to $26.06. Shareholders have lost 12.1% of their capital, which is disappointing considering the S&P 500 has climbed by 8.9%. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
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Why Is MGIC Investment Not Exciting?
Even though the stock has become cheaper, we don’t have much confidence in MGIC Investment. Here are three reasons why there are better opportunities than MTG, plus one stock we’d rather own.
1. Declining Net Premiums Earned Reflect Weakness
Insurers sell policies then use reinsurance (insurance for insurance companies) to protect themselves from large losses. Net premiums earned are therefore what's collected from selling policies less what’s paid to reinsurers as a risk mitigation tool.
MGIC Investment’s net premiums earned has declined by 1.2% annually over the last five years, much worse than the broader insurance industry. This shows that policy underwriting underperformed its other business lines.
2. Revenue Projections Show Stormy Skies Ahead
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 drop by 1.3%, a decrease from its 1.7% annualized growth for the past two years. This projection doesn’t excite us and indicates its products and services will see some demand headwinds.
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 9.4% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.7% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
MGIC Investment isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 1× forward P/B (or $26.06 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a top digital advertising platform riding the creator economy.
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