Radian stock is currently trading at an almost 50 percent discount to its inception price (Nov 6, 1992 - $4.80). Yesterday, the stock gained $0.20, or 9.13 percent, to close at $2.39, not very far from the 52-week low of $1.80, but far enough from it to reflect a slightly bullish view.
Should you now invest in it?
Is it hard to ignore the investment case?
Given that the company continued to pay dividends, albeit declining; despite reporting net losses in four of the last five years; and given that the stock is trading at a P/B ratio of 0.36 and a P/S ratio of 0.75 it is hard to pass off the opportunity to invest. However, in the last three years, the stock came close on two occasions to being declared a penny stock and delisted from the NYSE. So the danger of a reversal in stock price is a red signal in one's mind that the risk is possibly higher than the reward, both in terms of probability of the event and absolute gain or loss.
One can present both an investment case and exit case depending on the level of risk appetite and enterprising nature of the investor. Before we jump to any conclusion, let's try to see the odds and evens.
Company's overview
Radian Group's history dates back to 1977 with the founding of its predecessor company, CMAC. The group was incorporated as a business corporation under the laws of the State of Delaware in 1991. In 1992, CMAC went public, and then merged with Amerin in 1999 to form Radian.
Radian is a group of separately capitalized companies that share a unified strategic focus. Its core business, Radian Guaranty Inc., provides private mortgage insurance to protect lenders from default-related losses, facilitate the sale of low-down payment mortgages in the secondary market and enable home buyers to purchase homes more quickly with down payments less than 20 percent. Radian Asset Assurance Inc., Radian Asset Assurance Limited and Radian Insurance Inc. are its major subsidiaries. The group also owns a partnership interest in C-BASS, which specialized in acquiring, servicing and securitizing credit-impaired residential mortgages that have been or are being foreclosed. In the second half of 2007, C-BASS exited the securitization business and is currently liquidating its existing portfolio.
Business and value creation through the years
Radian is a classic case of all the good and bad that happened in the financial sector in general and the mortgage sector in particular over the last decade. The company's business expanded at a rapid pace during 2001–08. Its total assets increased from $4.4 billion in 2001 to $8.1 billion in 2008. This translated to an increase in revenue from $906.9 million in 2001 to $1.8 billion in 2008. Through these years, book value per share increased from $24.54 at the end of 2001 to a peak of $51.23 in 2006. As all good things must come to an end, book value per share declined dramatically to $33.83 at the end of 2007. Book value per share fell to $24.22 at the end of 2009 and then dramatically to $6.46 at the end of 2010.
Book value per share as of yesterday slightly increased to $6.64. Is the turnaround a flash in the pan or likely to persist in the foreseeable future?
Industry environment and chances of RDN's turnaround
In the last three quarters ended September 2011, the company's reported EPS figures were significantly better than analysts' consensus estimates. Hence the rally in the stock. However, the positive trend is expected to weaken in the fourth quarter. Moreover, for FY 2012, the company is expected to report losses. So, those who are expecting quick gains from the rally in the stock would do well to keep away from the stock.
Is this the end of the story for RDN?
Definitely not. The company is expected to report positive earnings in 2013 and 2014. A few days back, RDN's competitor PMI Group (PMI) filed for Chapter 11 bankruptcy protection after a judge rejects its bid to overturn the seizure of its Arizona unit by regulators. RDN is likely to benefit from this development. Moreover, towards the end of Q3 the company reported an interesting and positive development.
On 26 September, 2011, Radian Group Inc. and the National League of Cities (NLC) announced an agreement to explore the formation of a new public finance mutual bond insurance company. Radian's financial guarantor subsidiary, Radian Asset Assurance Inc., will be working with the NLC on the venture. The agreement is a meaningful step toward the possible creation of a new mutual bond insurer. The NLC represents more than 19,000 municipalities in partnership with 49 state municipal leagues, which puts it in a unique position to sponsor a bond insurer, while its association with Radian adds resources, expertise, infrastructure and possibly also an existing insured municipal portfolio to the project. The NLC's initial effort to create a mutual bond insurer started in 2009 when it sought federal support. Radian Asset currently manages a $15 billion direct insurance and a $21 billion reinsurance municipal portfolio, but it stopped writing business in 2008. Recently, Radian Asset acquired a financial guaranty insurance shell licensed in 36 states and the District of Columbia, which offers it more flexibility to pursue strategic alternatives in the public finance market. The agreement is a positive development for Radian since it intends to leverage the firm's financial guaranty expertise, which has been under-utilized since it entered run-off. Depending on the structure of the venture, it could also accelerate the extraction of resources out of Radian Asset to benefit Radian's core mortgage insurance platform, Radian Guaranty.
Net on net, the long term story for the stock remains neutral to strong. Currently, analysts' one-year target price estimates range from a low of $3 to a high of $11 with a consensus of $5.50. I suggest accumulating the shares between $1.34 and $3.80 and selling them if they fall below $1.34 and rise above $3.80.
