Extended TCS Partnership And Mortgage Solutions Will Support Future Success

Key Takeaways

• Extended partnership with Tata Consultancy Services indicates ongoing innovation and operational efficiency, potentially enhancing net margins over time.
  
• Disciplined credit risk management and strategic stock repurchases are likely to boost earnings per share and return on equity.
  
• Economic uncertainty, interest rates, and regulatory changes may pressure profit margins, increase risk, and influence revenue and earnings stability.

Catalysts

Provides private mortgage guaranty insurance services in the United States.

• National MI's partnership with Tata Consultancy Services has been extended to 2032 on favorable terms, implying continued innovation and efficiency in operations, which could enhance net margins over time.
  
• The company has maintained low-cost, high-value mortgage insurance solutions, aiming to expand access to homeownership. This positions NMI to continue growing its insured portfolio, potentially increasing future revenue.
  
• Active engagement with the FHFA and GSEs under the leadership of Director Bill Pulte points to potential policy shifts that could further benefit private mortgage insurers like NMI, creating opportunities for future revenue growth.
  
• NMI's disciplined credit risk management and consistent pricing strategy across market cycles should help sustain strong credit performance and profitability, likely impacting earnings positively.
  
• The company has repurchased a significant amount of common stock and retained a large capacity for further repurchases, which could enhance earnings per share (EPS) and return on equity (ROE) in the future.

NMI Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NMI Holdings's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 55.3% today to 52.2% in 3 years time.
• Analysts expect earnings to reach $409.6 million (and earnings per share of $5.31) by about April 2028, up from $360.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, up from 7.3x today. This future PE is lower than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 2.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

NMI Holdings Future Earnings Per Share Growth

Risks

• Concerns about economic uncertainty, including tariffs and emerging market volatility, may impact risk assessments and borrower default rates, affecting future revenues and profitability.
  
• Changes in the macroeconomic environment could result in increased credit losses, particularly for newer vintages with less equity, potentially impacting net margins and earnings.
  
• The prolonged high-interest rate environment could limit refinancing opportunities and extend the duration of high-risk loans, which might affect the stability of net income and revenue growth.
  
• Competitive pressures and market dynamics necessitating frequent changes in pricing strategy could squeeze profit margins and affect earnings stability.
  
• Regulatory changes under new leadership at the FHFA or shifts in housing finance policy could impact the private mortgage insurance market, influencing revenue and profitability trajectory.

Valuation

• The analysts have a consensus price target of $41.857 for NMI 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 $47.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $784.1 million, earnings will come to $409.6 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $33.64, the analyst price target of $41.86 is 19.6% 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.