Why Higher Rates Might Not Crush MGIC Earnings
MGIC Investment will release its quarterly report on Wednesday, and at first glance, you might think investors would be nervous about the potential impact of higher interest rates on the company's mortgage-insurance business. Yet the stock has hung onto most of its gains in light of the housing market's recent recovery, and at least for now, improvement in MGIC earnings doesn't seem to be in jeopardy.
MGIC is just one of the many mortgage insurers that have seen immense volatility in recent years. Radian Group , Genworth Financial , and MGIC all suffered when plunging home values put them in danger of having to pay massive claims to make good on their mortgage insurance policies. Yet the double-digit percentage rise in home prices over the past year has given investors in Radian, Genworth, and MGIC alike hope that underwater mortgages will slowly disappear. Let's take an early look at what's been happening with MGIC Investment over the past quarter and what we're likely to see in its report.
Stats on MGIC Investment
Analyst EPS Estimate
Change From Year-Ago Revenue
Earnings Beats in Past 4 Quarters
Source: Yahoo! Finance.
How will MGIC earnings fare this quarter?
Analysts have gotten a lot more optimistic about MGIC earnings in recent months, cutting their loss projections for the third quarter by a dime per share and more than doubling their expected profit for the 2014 year. The stock has added to its recent gains, rising another 24% since mid-July.
The recovery in MGIC's business is pretty easy to understand. High loan delinquency rates are the biggest threat to MGIC and its peers, and the industry has seen a big drop in delinquencies lately. Over the past year, MGIC has seen a 24% drop in delinquencies, even outpacing Radian's 21% and Genworth's 23%. Moreover, with competition from the FHA starting to slacken, MGIC has a better opportunity to capture its share of the private market.
Another big argument in favor of MGIC is that home prices are back on the rise. In its second-quarter report, MGIC had a surprise profit on the back of a 36% jump in new business. As more homebuyers get back into the housing market, prices have risen, and that in turn helps remedy some of its problem legacy loans, and also add new, healthier policies into its book of business.
But MGIC still has to face competitive pressures. In addition to Radian and Genworth, newer companies that lack the legacy problems that MGIC has could pose a long-term threat. As Fool Financial Bureau Chief Matt Koppenheffer recently discussed, Essent Group was formed at the depths of the financial crisis, and by starting to do business at the bottom of the housing market, it avoided the bad business that its older peers are still dealing with. With Essent expecting to go public in the near future, it will raise exposure for other potential MGIC competitors going forward.
In the MGIC earnings report, watch to see whether the company's delinquency rates continue to fall. If so, MGIC should be able to stay on the road back to profitability in the near future -- as long as the housing recovery keeps pushing forward in the face of rising interest rates.
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The article Why Higher Rates Might Not Crush MGIC Earnings originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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