Essent Group Ltd. (NYSE:ESNT) closed at $62.04 on October 13. The stock has returned 6.80% during the last six months, compared to a 21.5% return for the Insider Monkey Billionaire Index and 14.0% for the State Street SPDR S&P 500 ETF Trust.
Essent began as a mortgage insurer and still mostly is one. It protects lenders when a borrower with a small deposit stops paying. In recent years, it has added title insurance and a reinsurance arm alongside that core business.
The result is a company growing while its closest comparison shrinks. That makes it an easier story to like than most of this sector. Easy stories are not always the best investments, which is the tension worth examining.
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Growing While the Neighbours Shrink:
Revenue rose 13.60% in the most recent quarter. MGIC, the closest comparison in this sector, saw revenue fall over the same period. In an industry where high rates are cutting the flow of new policies, growing at all is unusual.
The margins are strong alongside that growth. Operating margin is 65.75%, so roughly two-thirds of revenue survives as operating profit. That is a high figure for a company that has been adding new lines of business.
Essent is among the insurers billionaires bought in our 10 Best Mortgage Finance Stocks To Buy According to Billionaires. To see how it ranked, click HERE.
Growth That Is Not Reaching the Owners:
Return on equity is 12.01%. That is lower than MGIC manages at 13.92%, and MGIC’s revenue is falling. Essent is growing faster and turning less of its shareholders’ money into profit, and both of those are true at once.
Part of the reason is that the company holds a large equity base relative to what it earns. Regulators require insurers to hold capital against the policies they write, and a bigger cushion means a lower return on it. Safety and high returns on equity tend to pull in opposite directions.
The underlying exposure has not changed much either. Most of the profit still depends on American homeowners keeping their jobs. Title insurance and reinsurance spread the risk a little, but they do not make this a different kind of company.
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Cheap by the Numbers, Fair by the Business:
The shares trade at 9.13 times the past year and 8.23 times what analysts expect next year. Single-digit multiples on a business with these margins look like an obvious mispricing until you remember what the market is worried about.
