Earnings

A Side-by-side Analysis of MGIC Investment Corporation (MTG) and Old Republic International Corporation (ORI)

MGIC Investment Corporation (NYSE:MTG) shares are up more than 33.95% this year and recently increased 1.87% or $0.25 to settle at $13.65. Old Republic International Corporation (NYSE:ORI), on the other hand, is up 9.84% year to date as of 11/13/2017. It currently trades at $20.87 and has returned 1.56% during the past week.

MGIC Investment Corporation (NYSE:MTG) and Old Republic International Corporation (NYSE:ORI) are the two most active stocks in the Property & Casualty Insurance industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect MTG to grow earnings at a 8.89% annual rate over the next 5 years.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 9.23% for Old Republic International Corporation (ORI). MTG’s ROI is 10.70% while ORI has a ROI of 8.60%. The interpretation is that MTG’s business generates a higher return on investment than ORI’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. MTG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.33. Comparatively, ORI’s free cash flow per share was +0.72. On a percent-of-sales basis, MTG’s free cash flow was 11.5% while ORI converted 3.22% of its revenues into cash flow. This means that, for a given level of sales, MTG is able to generate more free cash flow for investors.

Financial Risk

MTG’s debt-to-equity ratio is 0.27 versus a D/E of 0.32 for ORI. ORI is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MTG trades at a forward P/E of 11.32, a P/B of 1.62, and a P/S of 4.77, compared to a forward P/E of 13.76, a P/B of 1.15, and a P/S of 0.90 for ORI. MTG is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. MTG is currently priced at a -10.9% to its one-year price target of 15.32. Comparatively, ORI is -16.52% relative to its price target of 25.00. This suggests that ORI 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 1.80 for MTG and 2.30 for ORI, which implies that analysts are more bullish on the outlook for ORI.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. MTG has a beta of 2.30 and ORI’s beta is 1.38. ORI’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. MTG has a short ratio of 1.90 compared to a short interest of 4.86 for ORI. This implies that the market is currently less bearish on the outlook for MTG.

Summary

MGIC Investment Corporation (NYSE:MTG) beats Old Republic International Corporation (NYSE:ORI) on a total of 9 of the 14 factors compared between the two stocks. MTG is growing fastly, is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, MTG has better sentiment signals based on short interest.

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