- By GF Value
The stock of Essent Group (NYSE:ESNT, 30-year Financials) gives every indication of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $42.39 per share and the market cap of $4.8 billion, Essent Group stock gives every indication of being modestly undervalued. GF Value for Essent Group is shown in the chart below.
Because Essent Group is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 14% over the past three years and is estimated to grow 5.68% annually over the next three to five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Essent Group has a cash-to-debt ratio of 0.32, which which ranks worse than 84% of the companies in Banks industry. The overall financial strength of Essent Group is 5 out of 10, which indicates that the financial strength of Essent Group is fair. This is the debt and cash of Essent Group over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Essent Group has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $955.2 million and earnings of $3.88 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Banks industry. Overall, the profitability of Essent Group is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Essent Group over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Essent Group's 3-year average revenue growth rate is better than 86% of the companies in Banks industry%. Essent Group's 3-year average EBITDA growth rate is 3.3%, which ranks in the middle range of the companies in Banks industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Essent Group's return on invested capital is 9.32, and its cost of capital is 9.02. The historical ROIC vs WACC comparison of Essent Group is shown below:
In closing, Essent Group (NYSE:ESNT, 30-year Financials) stock is believed to be modestly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Banks industry. To learn more about Essent Group stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.