On Jan 2, 2015, Zacks Investment Research upgraded Radian Group Inc. (RDN) by a notch to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
Radian has been riding on a strong growth momentum in the last 30 days given the company’s agreement to vend of its bond guaranty insurance (Radian Guaranty) wing – Radian Asset Assurance Inc., for about $810 million to Assured Guaranty Ltd.’s (AGO) subsidiary – Assured Guaranty Corp. The transaction is scheduled to culminate by Jun 2015.
While the deal complements Assured Guaranty’s financial guaranty business, the resulting proceeds will help Radian Group comply with capital requirements, as mandated by Private Mortgage Insurer Eligibility Requirements. The new capital regulations were proposed by the Federal Housing Finance Agency in Jul 2014.
Although Radian Group expects to incur a loss from the divestment in fourth-quarter 2014, the asset accretion (of Radian Guaranty by about $790 million) and regulation compliance will amplify the company’s competitive leverage, particularly, in the ongoing scenario where many peers have stalled or trimmed their mortgage insurance operations due to inadequate capital, higher claims and surmounting losses.
Alongside, Radian Group’s growth impetus stems from improved core fundamentals throughout 2014, which are cushioned by strong operating leverage and a modest capital position. Apart from improving core strengths, delinquencies and housing market, the sale scores well with the ratings agencies, whereby Moody’s Investor Service is reviewing Radian Group for an upgrade.
Radian Group also outperformed the one-year S&P 500 index, which posted an increase of 11.8% against a return of 16.4% clocked by the company. Additionally, this private mortgage insurer has kept its earnings streak alive by delivering positive earnings in the trailing four quarters, with an average beat of 65.5%. Radian Group’s third-quarter 2014 operating earnings per share of 72 cents also topped the Zacks Consensus Estimate of 32 cents by 125%.
Upward estimate revisions raise optimism. Following the announcement of the deal, the Zacks Consensus Estimate for 2014 moved north by 4.2% to $2.75 per share in the last 30 days, also up about 711% on a year-over year basis. No downward revision in estimates was witnessed for the year either.
Other Stocks to Consider
Other promising insurers in the industry include Assurant Inc. (AIZ) and FBL Financial Group Inc. (FFG). Both these stocks carry the same Zacks Rank as Radian Group.
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