On Thursday, Keefe, Bruyette & Woods adjusted its stance on Radian Group Inc . (NYSE:RDN), downgrading the stock to Market Perform from Outperform and slightly lowering the price target to $35.00 from $36.00. The revision follows a period of outperformance in the mortgage insurance sector compared to the broader market, with an average rally of 47% over the past year and 10% in the last month for mortgage insurance stocks, contrasting with the S&P 500's gains of 27% and 1%, respectively.
The downgrade reflects concerns about the potential for slowing growth in the residential mortgage market and the implications for capital returns. Despite a period of benign residential mortgage credit contributing to strong returns on equity (ROEs), the firm anticipates that slower growth may prompt more questions about the sustainability of capital return strategies, particularly as share buybacks become less accretive due to higher valuations.
Keefe, Bruyette & Woods notes that while the sector remains favorable, the recent price increases for shares suggest that they are approaching fair value. This assessment has led to the downgrade of Radian Group and another mortgage insurer, MTG, both to Market Perform based on valuation. The firm now reserves its only Outperform rating for ACT.
In conjunction with the downgrades, Keefe, Bruyette & Woods has also realigned its price targets for the sector. The updated targets aim to reflect a more accurate projection of longer-term ROEs and account for the roll-forward of base book value to the first quarter of 2024. This recalibration has resulted in higher targets for four out of five companies within the sector, with Radian Group being the exception, receiving a modestly lower target.
InvestingPro Insights
Recent updates from InvestingPro provide valuable insights into Radian Group Inc. (NYSE:RDN) that may interest investors, especially in light of Keefe, Bruyette & Woods' downgrade. The company's commitment to shareholder returns is evident, with Radian raising its dividend for four consecutive years and maintaining payments for 32 years. Analyst sentiment appears positive, as four analysts have revised their earnings upwards for the upcoming period, and the company is expected to remain profitable this year.
InvestingPro Data highlights a robust financial position for Radian Group, with a market capitalization of $5.15 billion and an attractive P/E ratio that has slightly decreased to 8.26 for the last twelve months as of Q4 2023. The company has also demonstrated solid revenue growth of 4.19% over the same period. Furthermore, investors may find the company's liquidity reassuring, as liquid assets exceed short-term obligations, providing financial stability.
For those looking to delve deeper, InvestingPro offers additional insights, including PRONEWS24 for a 10% discount on a yearly or biyearly Pro and Pro+ subscription. With a total of 11 InvestingPro Tips available, investors can gain a comprehensive understanding of Radian Group's performance and potential investment opportunities.
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