NMI Holdings, Inc. (NASDAQ:NMIH) shares are up more than 9.12% this year and recently decreased -1.85% or -$0.35 to settle at $18.55. Ambac Financial Group, Inc. (NASDAQ:AMBC), on the other hand, is down -1.19% year to date as of 02/02/2018. It currently trades at $15.79 and has returned -4.76% during the past week.
NMI Holdings, Inc. (NASDAQ:NMIH) and Ambac Financial Group, Inc. (NASDAQ:AMBC) are the two most active stocks in the Surety & Title Insurance industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect NMIH to grow earnings at a 15.92% annual rate over the next 5 years. Comparatively, AMBC is expected to grow at a 11.00% annual rate. All else equal, NMIH’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. NMI Holdings, Inc. (NMIH) has an EBITDA margin of 22.37%. This suggests that NMIH underlying business is more profitable NMIH’s ROI is 13.00% while AMBC has a ROI of 1.40%. The interpretation is that NMIH’s business generates a higher return on investment than AMBC’s.
Cash is king when it comes to investing. NMIH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.40. Comparatively, AMBC’s free cash flow per share was -. On a percent-of-sales basis, NMIH’s free cash flow was 0.02% while AMBC converted 0% of its revenues into cash flow. This means that, for a given level of sales, NMIH is able to generate more free cash flow for investors.
NMIH’s debt-to-equity ratio is 0.28 versus a D/E of 8.77 for AMBC. AMBC is therefore the more solvent of the two companies, and has lower financial risk.
NMIH trades at a forward P/E of 14.61, a P/B of 2.17, and a P/S of 6.99, compared to a forward P/E of 2.83, a P/B of 0.48, and a P/S of 1.07 for AMBC. NMIH is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. NMIH is currently priced at a -10.26% to its one-year price target of 20.67. Comparatively, AMBC is -34.21% relative to its price target of 24.00. This suggests that AMBC is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.60 for NMIH and 2.00 for AMBC, which implies that analysts are more bullish on the outlook for AMBC.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. NMIH has a beta of 0.88 and AMBC’s beta is 1.79. NMIH’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. NMIH has a short ratio of 2.74 compared to a short interest of 4.51 for AMBC. This implies that the market is currently less bearish on the outlook for NMIH.
NMI Holdings, Inc. (NASDAQ:NMIH) beats Ambac Financial Group, Inc. (NASDAQ:AMBC) on a total of 10 of the 14 factors compared between the two stocks. NMIH is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, NMIH has better sentiment signals based on short interest.