Unstable Markets And Regulatory Risks Threaten The Future Of Structured Finance Earnings

Key Takeaways

• Expansion into new markets may underdeliver, impacting revenue growth and risking future earnings from U.K. regulatory exposure and volatile investments.
  
• Inefficient capital use and potential unsustainability in bond issuance could negatively affect future revenues and earnings stability.
  
• Strong financial metrics, growth in business segments, and robust investments enhance Assured Guaranty's market position, investor confidence, and shareholder returns.

Catalysts

Provides credit protection products to public finance, infrastructure, and structured finance markets in the United States and internationally.

• There is concern that Assured Guaranty's growth in the global structured finance market and expanding into new geographic areas may not produce expected returns, potentially impacting future revenue growth.
  
• The uncertainty surrounding Assured Guaranty's exposure to U.K. water utilities and the future rate adjustments by the U.K. water regulator could pose risks to future earnings and capital requirements.
  
• The continuation of unchanged insurance company ratings and high capital reserves despite restructuring could lead to inefficient capital utilization, affecting net margins.
  
• There is a risk that the current high level of municipal bond issuance and insured par growth may not be sustainable, which could negatively impact Assured Guaranty's future revenue levels.
  
• Concerns over a heavy reliance on alternative investments for earnings, given fluctuating market conditions, could pose risks to sustained growth in net investment income, affecting future earnings stability.

Assured Guaranty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Assured Guaranty's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 87.3% today to 23.5% in 3 years time.
• Analysts expect earnings to reach $215.3 million (and earnings per share of $5.14) by about November 2027, down from $730.0 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 23.0x on those 2027 earnings, up from 6.5x today. This future PE is greater than the current PE for the US Insurance industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 6.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

Assured Guaranty Future Earnings Per Share Growth

Risks

• Assured Guaranty has achieved record highs in adjusted book value per share and adjusted operating shareholders' equity per share, indicating strong financial performance which could support share price stability or growth. (Financial impact: Earnings, revenue)
  
• The company reported significant growth in new business production across its U.S. public finance, non-U.S. public finance, and global structured finance market segments, highlighting robust demand for their services that could bolster future revenues. (Financial impact: Revenue)
  
• Stable and high financial strength ratings from major agencies support the company’s market position, enhancing investor confidence and potentially benefiting long-term earnings and valuation. (Financial impact: Earnings)
  
• Strong financial performance from alternative investments and trading securities has contributed significantly to earnings, with an inception-to-date return on investments of approximately 13%, underpinning potential continued income growth. (Financial impact: Earnings, revenue)
  
• A robust share repurchase program, with an additional authorization for $250 million, reflects strong capital management and could enhance shareholder returns, which may positively influence the company’s stock price. (Financial impact: Earnings per share)

Valuation

• The analysts have a consensus price target of $100.5 for Assured Guaranty 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 $113.0, and the most bearish reporting a price target of just $87.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $915.6 million, earnings will come to $215.3 million, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $91.41, the analyst's price target of $100.5 is 9.0% 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.