MGIC Downgraded As Shares Close In On BofA's Price Target

Shares of mortgage insurer MGIC Investment Corp. MTG have gained about 5 percent since the lows reached after price cuts were announced in April, leaving limited room for upside, according to Bank of America Merrill Lynch.

The Analyst

Analyst Mihir Bhatia downgraded MGIC from Neutral to Underperform and maintained an $11.50 price target.

The Thesis

MGIC's valuation is likely to be capped until prices stabilize and clarity emerges on capital standards, Bhatia said in a Wednesday note. Mortgage insurance stocks hinge on "potential changes in the competitive and regulatory landscape," and MGIC's stock slipped about 17 percent after the April price cut, the analyst said.  

Price competition could be receding, as the company recently added granularity to its borrower-paid rate card and brought its pricing in line with peers, Bhatia said.

Investors are unlikely to return to the stock immediately, the analyst said. 

"While we expect capital changes to be manageable, we think legacy insurers (like MTG) are most at-risk for negative surprises." 

Near-term operating metrics should remain favorable, as the mortgage insurer benefits from pre-crisis mortgages running off, Bhatia said. MGIC is likely to grow insurance in-force and maintain operating expenditure discipline over the next couple of years, he said. 

"With MTG already trading at a premium to peer Radian Group Inc RDN, we think upside potential is limited," the firm added.

The Price Action

MGIC shares were down 0.98 percent off the open Wednesday. 

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