Technology And GSE Expansion Will Strengthen Future Mortgage Insurance Prospects

Key Takeaways

• Technological improvements and lender engagement may boost core mortgage insurance revenue and operational efficiency, potentially enhancing net margins.
  
• Expansion into GSE credit risk and disciplined expense management could provide long-term growth and improve shareholder value through capital return strategies.
  
• Heavy reliance on the U.S. housing market and exposure to natural disasters and delinquencies may lead to volatility and impact future revenue and margins.

Catalysts

Operates as a private mortgage insurance company in the United States.

• Enact Holdings plans to leverage technology enhancements and customer engagement to deepen relationships with lenders, which could drive growth in its core mortgage insurance (MI) business and positively impact revenue.
  
• The expansion into GSE credit risk transfer markets via Enact Re is expected to provide a long-term growth opportunity, enhancing revenue over time as the platform scales and explores additional commercial opportunities.
  
• The company is committed to disciplined expense management, with investments in technology solutions aimed at improving operational efficiencies. This focus could lead to improved net margins by reducing overall expenses relative to revenue.
  
• Elevated persistency levels in the face of current high mortgage rates are anticipated to support the company's insurance in force, indirectly benefiting earnings by maintaining a stable revenue base.
  
• Share buybacks and dividends indicate a robust capital return strategy, potentially increasing earnings per share (EPS) through a reduction in outstanding shares, thereby enhancing shareholder value.

Enact Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enact Holdings's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 57.1% today to 48.0% in 3 years time.
• Analysts expect earnings to reach $661.6 million (and earnings per share of $4.58) by about December 2027, down from $682.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2027 earnings, up from 7.8x today. This future PE is lower than the current PE for the US Diversified Financial industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Enact Holdings Future Earnings Per Share Growth

Risks

• The company's performance is heavily reliant on the U.S. housing market, which is currently experiencing constrained supply and higher mortgage rates that could lead to volatility and impact revenues.
  
• Enact Holdings is facing new delinquencies due to seasonality and aging of new books, which could affect future revenue and net margins if they lead to unexpected claims and lower profitability.
  
• The company's reliance on a competitive market with fluctuating pricing dynamics raises concerns over sustaining market share and potential pressures on earnings from reduced net premiums.
  
• Potential impacts from hurricanes and other natural disasters are a risk, as they can cause increases in delinquent accounts and require significant reserves, potentially reducing net margins.
  
• The longer-term success of strategic initiatives, including Enact Re’s expansion, may carry execution risk and uncertainty that could impact growth prospects and future earnings if expected returns do not materialize.

Valuation

• The analysts have a consensus price target of $38.5 for Enact Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.0, and the most bearish reporting a price target of just $35.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $661.6 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of $34.48, the analyst's price target of $38.5 is 10.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.