On Thursday, Keefe, Bruyette & Woods adjusted their stance on MGIC Investment Corporation (NYSE:MTG), moving the stock's rating from Outperform to Market Perform, while slightly raising the price target to $24.00 from $23.50.
The revision comes amidst a backdrop of a challenging residential mortgage market. Despite the sector's difficulties, mortgage insurance stocks have seen a significant rally, with an average increase of 47% over the past year and 10% over the past month. This compares to the S&P 500's gains of 27% and 1%, respectively, over the same periods.
The firm cited robust returns on equity (ROEs) fueled by a benign residential mortgage credit environment. However, concerns are growing due to the deceleration in growth, which could lead to more scrutiny over capital returns as stock buybacks may become less beneficial for shareholders given the stocks' higher valuations. While the sector still holds appeal for Keefe, Bruyette & Woods, the belief is that the shares are approaching their fair value, prompting the downgrade.
The adjustment of MGIC Investment's rating was part of a broader reassessment that also included a downgrade for Radian Group Inc . (NYSE:NYSE:RDN), shifting both companies to Market Perform ratings. In contrast, the firm's only remaining Outperform-rated stock within the sector is now ACT.
As part of this sector-wide evaluation, Keefe, Bruyette & Woods recalibrated their price targets for several companies. This move was intended to better reflect the anticipated longer-term returns on equity. The recalibration also took into account the forward-rolling of the base book value to the first quarter of 2024 estimates, which led to increased targets for four out of five companies reviewed, with Radian Group receiving a modest decrease in its target.
InvestingPro Insights
Adding to Keefe, Bruyette & Woods' recent assessment of MGIC Investment Corporation (NYSE:MTG), InvestingPro data reveals a company with a robust financial standing. With a market capitalization of $5.85 billion and a compelling price-to-earnings (P/E) ratio of 8.65, MGIC stands out in its sector. The adjusted P/E ratio for the last twelve months as of Q4 2023 further underscores this point, coming in at a slightly lower 8.2. This valuation metric suggests that the stock may be undervalued, especially when considering the company's consistent history of dividend growth, now standing at 5 consecutive years and a dividend yield of 2.12%.
InvestingPro Tips for MTG highlight management's proactive approach, with aggressive share buybacks and a series of earnings revisions by analysts pointing towards positive expectations for the upcoming period. The company's liquidity is also noteworthy, as its liquid assets exceed short-term obligations, providing financial flexibility. Moreover, MGIC has been profitable over the last twelve months, and analysts predict profitability will continue this year.
For investors looking to delve deeper into MGIC's potential, InvestingPro offers additional insights. There are 9 more InvestingPro Tips available that could provide a more comprehensive understanding of the company's prospects. To explore these further, visit https://www.investing.com/pro/MTG and remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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