Flat Mortgage Insurance And Share Buybacks Will Curtail Future Prospects

Key Takeaways

• High persistency rates boost the insurance portfolio but may limit new volume growth and slow revenue increase from new policies.
  
• Capital return focus through buybacks might limit future growth investments, potentially affecting long-term earnings.
  
• Radian’s proactive capital management and innovative reinsurance strategies indicate confidence, stable earnings potential, and robust operational performance.

Catalysts

Engages in the mortgage and real estate services business in the United States.

• Elevated interest rates may continue to benefit Radian's insurance portfolio by maintaining high persistency rates, potentially limiting opportunities for new insurance volume growth and impacting revenue growth.
  
• Radian anticipates the persistency rate of their current insurance in force to remain strong due to reduced likelihood of refinancing, potentially slowing revenue growth from new insurance policies.
  
• A focus on capital return through buybacks could hinder future growth investments, potentially affecting long-term revenue and earnings prospects.
  
• Uncertainty in financial markets due to global trade policies and tariffs could impact the credit environment, potentially influencing net margins if default rates or unemployment were to increase.
  
• The expectation of flat mortgage insurance market growth could constrain Radian’s revenue expansion opportunities, impacting earnings growth over time.

Radian Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Radian Group's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 46.3% today to 36.8% in 3 years time.
• Analysts expect earnings to reach $522.5 million (and earnings per share of $4.25) by about May 2028, down from $596.6 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 9.2x on those 2028 earnings, up from 7.6x 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 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 7.25%, as per the Simply Wall St company report.

Radian Group Future Earnings Per Share Growth

Risks

• The high persistency rate of 86% benefits Radian's insurance in-force, which is a major driver of future earnings, suggesting stability and potential growth in revenue.
  
• Radian's proactive capital management, including a large amount of share buybacks, could signal confidence in the company's future earnings and help improve net margins.
  
• The company's innovative reinsurance strategies secure both coverage and flexible terms, suggesting potential for stable earnings and efficient capital management.
  
• Strong cure trends and low claim levels indicate effective loss provisions and healthy net earnings, highlighting robust operational performance.
  
• The positive impact of current interest rates on Radian's investment portfolio income and its persistency rate shows potential for enhanced earnings stability.

Valuation

• The analysts have a consensus price target of $36.167 for Radian Group 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 $40.0, and the most bearish reporting a price target of just $34.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $522.5 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $33.58, the analyst price target of $36.17 is 7.2% higher. 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.