Is Radian Group Likely to Outperform?

With shares of Radian Group (NYSE:RDN) trading at around $6.61, is RDN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The first thing you should know about Radian Group is that it’s a volatile stock with a Beta of 3.43 and a short position over 28 percent. If you’re looking for something steady and stable, then you might want to look somewhere else.

In 2012, Radian Group wrote $37.1 billion on new MI business. This was a significant increase over $15.5 billion in 2011. Currently, Radian Group’s risk-to-capital ratio is 20.8:1, and Radian Group expects it to remain below 25:1 through 2013. As far as earnings go, Q4 EPS came in at -$1.34 versus -$0.92 for the same quarter one year ago. Q4 revenue was $226.06 million versus $364.55 million for the same quarter one year ago. For FY2012, EPS came in at -$3.64 versus $2.26 in 2011. FY2012 revenue was $825.41 million versus $1.9 billion in 2011. Supposedly, 2012 was a year of sacrificing for the future, but how many years can this company sacrifice for the future before investors wake up and say, “Wait a minute?” That said, the stock has performed exceptionally well over the past year.

On the positive side, Radian Group has seen increased volume of new, high-quality mortgage business for several consecutive quarters. Radian Group has also reduced delinquent loans by 16 percent. And in January of this year, the company wrote $4 billion of new business. This is in addition to $11.7 billion worth of new mortgage insurance being written in Q4 2012, which was a significant improvement over $6.4 billion being written in Q4 2011.

Back to the negative side, Radian Group has poor margins, an ROE of -35.91 percent, poor cash flow, and revenue growth that is below the industry average.

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal   

The debt-to-equity ratio for Radian Group is normal. The balance sheet is excellent and is the greatest strength for the company on a fundamental level.

Debt-To-Equity

Cash

Long-Term Debt

RDN

0.84

$4.95 Billion

$768.77 Million

MTG

1.22

$730.40 Million

$815.05 Million

AIG

0.72

$49.10 Billion

$73.75 Billion

 

T = Technicals on the Stock Chart Are Strong

Radian Group has underperformed the market over a three-year time frame, but it has performed extremely well over the past year, in which Radian Group has outperformed MGIC Investment Corp. (NYSE:MTG) and American International Group (NYSE:AIG) by wide margins. Radian Group is the only company of the three to offer yield, but it’s a miniscule 0.10 percent.

1 Month

Year-To-Date

1 Year

3 Year

RDN

6.80%

8.02%

95.30%

-15.28%

MTG

-4.81%

4.14%

-36.32%

-58.09%

AIG

13.11%

12.89%

49.47%

48.58%

 

At $6.61, Radian Group is currently trading above all its averages.     

50-Day SMA

5.80

100-Day SMA

5.15

200-Day SMA

4.06

 

E = Earnings Have Been Inconsistent              

Radian Group has only reported a profit in one of the last five years. Revenue has been all over the map.

2008

2009

2010

2011

2012

Revenue ($)in billions

1.81

1.31

417.64M

1.95

825.41M

Diluted EPS ($)

-5.12

-1.80

-15.74

2.26

-3.41

 

When we look at the last quarter on a year-over-year basis, we see a decline in earnings and revenue.  

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in millions

364.55

180.37

158.19

260.79

226.06

Diluted EPS ($)

-0.92

-1.28

-0.90

0.11

-1.34

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Industry trends are improving, but nobody really knows if this trend is sustainable.

On a definitive positive note, there has been a lack of new competition due to the complications of entering the business. Extreme volatility is another factor.

Conclusion

The only real positives here are trends supporting the industry and a strong balance sheet. Otherwise, this is an unprofitable company with sub-par growth, poor cash flow, and weak margins. The stock seems to have moved too far too fast.  

Radian Group is a STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.