Millennial And Gen Z Entry Will Advance Mortgage Insurance Demand

Key Takeaways

• Growing demand from younger homebuyers and urbanization trends will drive sustained revenue growth for MGIC's mortgage insurance offerings.
  
• Solid credit performance, conservative capital management, and ongoing efficiency initiatives will support higher margins, profitability, and shareholder returns.
  
• Flat core business growth, constrained new originations, high payout ratios, and housing market headwinds signal long-term profitability and capital strength challenges for MGIC.

Catalysts

Through its subsidiaries, provides private mortgage insurance, other mortgage credit risk management solutions, and ancillary services in the United States, the District of Columbia, Puerto Rico, and Guam.

• The ongoing entrance of Millennials and Gen Z into the housing market is expected to sustain demand for mortgage insurance, positioning MGIC for steady policy growth and future revenue expansion when affordability conditions improve or rates moderate.
  
• Urbanization, new household formation, and persistent pent-up demand for homeownership in the U.S. signal a robust long-term need for mortgage credit and insurance, underpinning resilient premium revenue and supporting revenue growth over time.
  
• MGIC's continued strong portfolio credit performance, prudent risk management, and lower-than-expected claim frequencies suggest lasting improvements in net margins and lower loss ratios, contributing to higher future earnings stability.
  
• Conservative capital management-including ongoing share buybacks and dividend increases-reduces outstanding share count and enhances EPS, directly benefitting shareholder returns and long-term earnings per share growth.
  
• Strong investment in operational efficiency and technology-driven cost controls, coupled with stable operating expenses, signal potential for margin expansion and greater bottom-line profitability in future periods.

MGIC Investment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MGIC Investment's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 62.6% today to 47.7% in 3 years time.
• Analysts expect earnings to reach $630.1 million (and earnings per share of $3.43) by about August 2028, down from $762.6 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 10.0x on those 2028 earnings, up from 8.3x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

MGIC Investment Future Earnings Per Share Growth

Risks

• Persistently flat insurance in force and annual persistency suggest limited growth in MGIC's core business, which, if prolonged, could constrain revenue expansion and earnings potential over the long term.
  
• Management acknowledges that market conditions are currently limiting the company's ability to prudently grow its insurance portfolio, implying that sustained low origination and growth may hinder MGIC's ability to generate new premiums-directly impacting future revenue and net margins.
  
• Elevated payout ratios (over 100% of net income) and heavy reliance on share repurchases reflect a lack of organic growth opportunities and could reduce the company's financial flexibility, potentially compromising long-term capital strength and future earnings stability.
  
• Ongoing affordability challenges, elevated interest rates, and slower home sales threaten new homebuyer demand and loan origination volume, which may restrict MGIC's policy growth and put pressure on both revenue and long-term profitability.
  
• Management expects an increase in delinquency rates as the large 2021 and 2022 insurance vintages age, which could lead to higher claims, elevated loss ratios, and adverse effects on net margins and future earnings.

Valuation

• The analysts have a consensus price target of $27.333 for MGIC Investment based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $630.1 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of $27.46, the analyst price target of $27.33 is 0.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.