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Radian Group Inc. Message Board

  • ponzicapitalltd ponzicapitalltd Nov 24, 2007 10:12 PM Flag

    Earnings estimates

    So we don't have reliable earnings estimates for the years 07 - 10 as yet. But we need them to calculate the intrinsic value of the company. At this point analysts' estimates are not much better than everybody else's. Therefore we get as reliable estimates as we can if everybody does his/her DD and thereafter we calculate the consensus estimates. This also gives the intrinsic value of the company quite accurately. We will follow the accuracy of the estimates and who has seen most clearly into the future.

    It is important that everybody on this board contributes. Give your earnings estimates (EPS) for the years 2007 - 2010. Here are mine

    2007: -1 $
    2008: -3 $
    2009: -1 $
    2010: 0 $

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    • And if forecasting bookvalue (and not earnings) is your cup of tea, just submit your bookvalue estimates.

    • you aren't joe ponzio from FWallstreet are you?

    • "Over a long time period, earnings and book value are correlated, but the correlation is indirect and asynchronous."

      I don't think you provided a counterexample for what I said since the relative magnitude of the asynchronous effects you describe gets smaller and smaller in the long run.

      "BV and earnings are not interchangeable valuation metrics, but complementary."

      Just to make sure, my point was of course that CHANGE in the book value in the long run is essentially the same thing than the earnings in the long run. (We don't want to consider here dividends etc.)

      "At a 70% discount, any earnings are good by me if the balance sheet is BV neutral or positive."

      That's a big if... I guess most of the investors would bet the balance sheet will exhibit dimishing BV at least for some time. And how long, that has to be found out.

    • In this business, at least, that's not entirely true.

      Losses are booked when the reserves are increased; typically several months before any cash is paid out on claims. Reserves for risk in default are provisional - the eventual claims paid may alter losses previously booked due to variances in cure rates and foreclosure proceeds. Reserves remain invested and earning income until claims are paid. Book value represents cash and assets surplus to liabilities and it is entirely possible for BV to increase while earnings are negative. Over a long time period, earnings and book value are correlated, but the correlation is indirect and asynchronous.

      In a rational market, the tangible book value backing a stock should provide a floor price (it is, after all the "equity")and the earnings would normally be reflected in a risk-adjusted premium over that price (if earnings are positive - discount when earnings are negative). BV and earnings are not interchangeable valuation metrics, but complementary.

      When earnings go negative, BV and sales become more important to stock price valuation. Sales growth helps to provide a measure of asset protection with positive cash flow. The amount of negative earnings that RDN can handle without amortizing book value depends partly on how much revenue growth can be sustained, on asset quality management, cash flow management, and on maintaining tight claims management on risk in default.

      Any earnings forecast right now doesn't mean a lot when we don't know the other variables to tell us how it compares with changes to the underlying equity value. At a 70% discount, any earnings are good by me if the balance sheet is BV neutral or positive.

    • Submit your estimates, it's important everybody contributes.

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