Hit by the slow economy, our first idea is a mortgage insurer is trading at a discount, and its addition to a visible index should help attract investors. Our second recommendation is a sale of a restaurant company that will be slow to recover from the pandemic.
Buy: Essent Group Ltd. (ESNT)
From SmallCap Informer
Essent Group reported a strong first quarter ended March 31, 2020. EPS was $1.52, up 16.9% compared to $1.30 for the quarter ended March 31, 2019. Revenues were up 14.1% to $228.8 million. Insurance in force as of March 31, 2020 was $165.6 billion, compared to $143.2 billion as of March 31, 2019. New insurance written for the quarter was $13.5 billion, compared to $11.0 billion in Q1 2019. Net premiums earned for the quarter were $206.5 million, compared to $177.8 million in the year-ago quarter. Finally, the expense ratio for the quarter was 20.3%, compared to 23.1% in the first quarter of 2019.
In its quarterly conference call, Mark Anthony Casale, CEO and Chairman, remarked, “As COVID-19 takes its toll on unemployment, we believe that defaults will increase during the second quarter and have a significant impact on our operating earnings.”
There is still much uncertainty about how severely the mortgage industry will be affected by the pandemic. Federal stimulus may help affected homeowners, and other programs may forestall foreclosures. As Casale commented, “One of the metrics that we are following is the percentage of mortgages and forbearance being reported by Black Knight [a provider of real estate analytics]. Most recently, they reported that 8% of the loans are in forbearance and estimate that this rate could hit 10% to 15% by June 30, which is consistent with our view.”
Management emphasizes that 90% of its book is covered by reinsurance and its capital and liquidity remain strong. The company does expect the costs of private mortgage insurance (PMI) to increase industrywide.
In late May, the company announced that it was offering 12 million shares in a secondary stock offering. Essent expects to raise $382.4 million from the offering, which will be used to pay down debt and for general corporate purposes. At the end of the first quarter, Essent borrowed $200 million from the revolving component of its credit facility. In addition to this, Essent had $225 million of term debt outstanding at March 31, 2020 and maintained $75 million of undrawn capacity under the revolving component of its credit facility.
In one bit of good news, after trading closes on June 1, 2020, Essent Group will join the S&P Mid-Cap 400 Index. Based on EPS reaching $5.69 in 2021 and growing at a 12.0% annualized rate after that, a five-year average annual growth rate of 7.1% is indicated starting from 2019’s EPS of $5.66. Essent Group ($33.05) is a buy up to $39.
Doug Gerlach, Smallcapinformer.com, 1-877-33-ICLUB, June 2020