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Weekly Stock Analysis

Updated: Jan 30, 2021


Company: Essent Group Ltd.

Ticker: ESNT Previous Close: $47.26 (1/19) Industry: Mortgage Finance


Short-term: Buy

Middle-term: Buy

Long-term: Buy



ANALYSIS:


Economic Moat


Free Cashflow

Essent Group Ltd. (ESNT):


Free Cashflow: $711,313,000

Revenue (= Sales): $936,717,000

Free Cashflow / Revenue (>5%) = 75.94% ➤ This is an extraordinarily great percentage and over the years there was consistent and strong growth realised by the company.


Net Margins (> 15%)

Essent Group Ltd. (ESNT):

Net Income (Consolidated) : $436,397,000

Revenue : $936,717,000

Net Margin = Net Income / Revenue = 46.59% ➤ This is a very good percentage as well as this being a similar case in the past meaning this is even better and indicative of sustained growth to come in the future.


ROE (> 15%)

Essent Group Ltd. (ESNT):


Return On Equity (ROE) = Net Income/Shareholder's Equity

ROE = 13.22% ➤ When simply comparing this percentage to the standard, a good return on equity percentage of at least 15% this merely a decent percentage for the company; however, when compared to its mortgage finance industry or even the financial services sector, this is actually a good percentage for the firm.


ROA (> 6%)

Essent Group Ltd. (ESNT):


Return On Assets (ROA) = Net Income / Assets

ROA = 7.47% ➤This is a very good percentage.


Economic Moat Conclusion


Essent Group Ltd. (ESNT): Altogether, Essent Group Ltd. has an extraordinarily good free cashflow and strong net income. Having such spectacular free cashflows and net incomes translates to noticeably good net margins and return on assets. This firm’s return on equity is decent, as previously mentioned, but when we compare that percentage with the mortgage finance industry average or even the financial services sector standard percentage, it can be clearly seen that this is actually a very good return on equity for this company. From each of these factors, it can be concluded that Essent Group Ltd. certainly has an economic moat so they are well protected against setbacks and competition which makes them a viable asset for long-term growth and sustainability.


Valuation

Essent Group Ltd.:

In calculating the current valuation of the Essent Group their current free cashflow of $711,313,000 will be taken into account. In the past, their cashflow mostly had a consistently strong, upward trend. Based on recently procured figures, I have assumed an average yearly growth of 18% in the first 5 years and 8% in the years following. Due to their economic moat, I was further able to calculate a discount rate of 8.5%. Each of these variables combined, I have come to estimate a fair value price per share of $233.69.


Current Price: $48.06

Estimated Fair Value Price: $233.69

➤ 79.43% Margin of Safety. This percentage is very great certainly when considering the extent of the company’s economic moat. Having considered all aspects related to the said economic moat and fair valuation of the firm, I have come to understand the Essent Group Ltd. is quite undervalued at the moment.


20 Point Analysis


1. CEO

Essent Group Ltd.: Mark A. Casale is the chairman, president, and CEO of Essent Group Ltd. He is the founder of Essent and has served as CEO and board member for the firm since 2008. Also, to be noted is that Casale has more than twenty-five years of experience in financial service management. For those looking further into the company details, these aspects regarding the CEO are indicative of his loyalty to the company and his passion for continuing to sustain excellence. Having such a stake in his own company it is apparent that Casale will focus on future endeavors for the years to come as they will not only benefit the company and the shareholders, but they will also benefit himself and to do this efficiently, he must contribute often as a leader at the company which again he has proven to do extremely well thus far.


2. Is the company innovative?

Essent Group Ltd.: Their focus is less so on innovation and more on providing the best in-class service so the short answer would be no; yet, this does not detract from the value of the company in any manner as they have found their path to operate efficiently and successfully and have continued to do so.


3. Can the company grow?

Essent Group Ltd.: Their core business is providing housing finance, which means their growth is tied to the real estate market. Overall, what this means is that growth is certainly possible and will likely continue well into the future since people will always need houses, apartments, and other living arrangements to reside in. More detail as to why they will be able to continue their growth can be found in Point 4.


4. How does the company grow?

Essent Group Ltd.: Since this firm’s business is linked directly with the housing market, their growth is as well. As previously mentioned, people will always need a home and t