Can Housing's Strength Boost MGIC's Earnings?

Next Tuesday, MGIC Investment will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

During the housing crash, MGIC got crushed, as the mortgage-insurance policies it wrote created huge amounts of liability. Despite some false starts since then, the housing market has started bouncing back, and investors have gotten interested in MGIC again. Let's take an early look at what's been happening with MGIC Investment over the past quarter, and what we're likely to see in its quarterly report.

Stats on MGIC Investment

 

 

Analyst EPS Estimate

($0.15)

Year-Ago EPS

($0.48)

Revenue Estimate

$282.4 million

Change From Year-Ago Revenue

(26%)

Earnings Beats in Past 4 Quarters

1


Source: Yahoo! Finance.

When will MGIC Investment start making money again?
Analysts have gone in different directions on MGIC recently, as they now see wider losses for its first-quarter results than they did a few months ago; but they think the company will lose $0.15 per share less for the full 2013 year than their previous projections. The stock has been anything but ambivalent, though, soaring 75% since mid-January.

MGIC has spent the past several years trying to clean up its balance sheet, and get bad-performing loans off its books. Although that process has moved slowly, the results have been encouraging, and investor optimism has also played a role in making the transition easier for MGIC. Last month, the company was able to raise more than $1 billion in capital through offerings of stock and convertible debt, yet those dilutive offerings didn't hurt the share price and helped the company reduce its sky-high risk-to-capital ratio.

One big piece of favorable news for MGIC during the quarter was the resolution of allegations from the Consumer Financial Protection Bureau over alleged kickbacks to lenders who directed borrowers to certain mortgage insurers. MGIC and peers Radian Group, Genworth Financial, and AIG's United Guaranty all ended up paying fines, but the more interesting question is whether the CFPB will go after the lenders themselves next.

The real issue for MGIC going forward is whether it will still be allowed to write new insurance. Fannie Mae and Freddie Mac have given MGIC waivers when its risk-to-capital ratios were above 25, and may have to keep doing so. The point of raising capital was to get back toward compliance, so it'll be interesting to see what impact MGIC's offerings have on its ratios going forward.

In MGIC's report, watch for signs of how activity in mortgage refinancing is proceeding. With some banks reporting troubling trends in mortgage activity, MGIC could face a problem if interest rates throw a wrench into the good times for the housing market lately.

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The article Can Housing's Strength Boost MGIC's Earnings? originally appeared on Fool.com.

Fool contributor Dan Caplinger owns warrants on AIG. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends AIG. The Motley Fool owns shares of and call options on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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