UPDATE: Compass Point Downgrades MGIC Investment Corp. to Neutral, Raises PT on Fairly Balanced Risk/Reward

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In a report published Wednesday, Compass Point analyst Jason Stewart downgraded the rating on MGIC Investment Corp.
MTG
from Buy to Neutral, but raised the price target from $3.00 to $5.00. In the report, Stewart noted, “We downgrade our rating of MTG shares to Neutral and increase our price target $5 per share. We have been staunch supporters of the role of private mortgage insurance (MI) in the US housing finance markets and that view has not changed. However, assigning a value greater than $5 to MTG shares today is akin to making a wager on the government's propensity and ability to transform the US housing finance market from one that is funded publicly to one largely funded by private capital. Historically, this wager has been met with outcomes most private MI common equity holders would classify as massively disappointing. We expect profitability metrics at MTG to gradually improve, but see no panacea to legacy credit issues and are somewhat skeptical regarding growth prospects in a market where GSE origination activity is expected to decline and competition for private MI is increasing. However, we see little risk in MTG's balance sheet and the sustainability of the core business. Despite viewing the recently executed reinsurance contract as a negative for common equity holders, as it shifts earnings during peak profitability to the reinsurance company and increases tail risk to common equity holders, we see the risk versus reward of MTG shares as fairly balanced at current trading levels.” MGIC Investment Corp. closed on Tuesday at $5.40.
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Posted In: Analyst ColorDowngradesAnalyst RatingsCompass Point
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