Stock Watch
MGIC Investment: Rising With Home Prices
As the gap widens between home prices and personal income, this provider of private mortgage insurance receives more business and raises premiums.
September 4, 2003
When homebuyers can't scrape together the standard 20% down payment for their mortgage, MGIC Investment (MTG) steps in. The holding company for Mortgage Guaranty Insurance Corporation, the nation's leading provider of private mortgage insurance to lenders, has seen business soar over the past few years, thanks to record home sales.
Rising home prices is also a trend largely in MGIC's favor. Because the average cost of housing increases faster than personal income, the average mortgage size swells to the point that buyers have even more difficulty coming up with a down payment. That means more business for MGIC, and an ability to raise premiums in line with demand.
As interest rates rise and home sales taper over the next year, business will likely slow from its torrid pace. And the nation's economic condition has increased delinquencies. However, says Morningstar analyst Dryfus Neenan, MGIC's fat profit margins and skilled underwriters should help sustain the company's leading position over the long term. The insurer earns one of the highest net margins in the S&P 500, exceeding 48% over the past three years. MGIC is one of only nine companies Morningstar awards its top five-star ranking.
In the high $50s, the stock trades at an attractive 10 times 2004 consensus earnings estimates of $5.64. Although Neenan estimates a 5% decline in MGIC's business next year, the stock is still undervalued, he says, and is worth $85.
--Erin Burt