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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


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.


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 the majority of these people will, as a result, need financing to purchase their homes. Since the general population continues to grow at exponential rates this means that the demand for housing will also increase which, in turn, results in Essent’s future growth opportunities increasing as well. Now, this extent to which Essent grows will be dependent on their ability to tap into new and old trends both maintaining previous clients and acquiring new ones, but, to say the least, the future is bright for the firm.

5. Is the company market leader?

Essent Group Ltd.: This firm is not currently a market leader and they also operate within in a highly competitive space. Though this could be seen as a detrimental factor to future growth, they continually attempt to distinguish themselves from the competition by providing best-in-class customer service and maintaining strong capital positions.

6. Is the market leadership safe?

Essent Group Ltd.: They have an economic moat better than most and distinguishing attributes that aid in Essent having and keeping a strong position in the market. Market leadership is neither fully protected nor guaranteed, but at the moment Essent does seem to be doing very well in maintaining a leading role in both the industry and sector.

7. Is there foreign exchange risk or commodities risk?

Essent Group Ltd.: This company is influenced by several risks, most notably the interest rate risk. Essent has strategies in place that they are often executing counteract interest rate risk and fluctuations, but of course, this also costs them a considerable amount of money to mitigate.

8. How are the profit margins?

Essent Group Ltd.: This company has net margins of 46.59% which is great. Their past performance in this area was also great which is extremely promising for future growth and opportunities.

9. How much capital does the company need?

Essent Group Ltd.: Overall, in order for them to operate at the highest level of efficiency Essent needs sufficient amounts of capital for loans; yet, it should be noted once more that they have a very strong capital position and a number of cashflows which helps afford all expenses for business operations.

10. Does the company have loyal customers?

Essent Group Ltd.: There is a strong focus on customer service and building long-term relationships (both from a business to consumer perspective and business to business perspective). This focus has made the company admirable and created a great reputation for them in providing the customers with the best possible service which then generates sustained loyalty over time between Essent and their clients.

11. How much cash does the company produce?

Essent Group Ltd.: Their free cashflows are extraordinarily high compared to their revenue. As discussed in Point 9 this is necessary in maintaining efficient business operations so they are well balanced in that regard.

12. Value creation over the past ten years?

Essent Group Ltd.: Since their IPO in 2013, the Essent stock has increased 117% which is quite remarkable given the tumultuous events that have shaken the economy since that time and have caused other firms and businesses to see limited growth over the years or even fail altogether.

13. Can the company pay its bills?

Essent Group Ltd.: This statistic is not available for Essent (since they fall under the category of banks and insurance companies).

14. How does the company finance itself?

Essent Group Ltd.: Once more, the company finances itself by maintaining good cash reserves and continually producing free cashflows.

15. How much debt does the company have?

Essent Group Ltd.: Long term debt: $424.7M Shareholders equity: $3,746.5M ➤ debt to equity ratio: 0.11 ➤ This is a very low number which is great and means that their debt is manageable and is likely to pose no major threats for the future operations and growth of the business.

16. What is their Piotroski F-score?

Essent Group Ltd.: Not available for Essent (since they fall under the category of banks and insurance companies).

17. What is the P/E-ratio?

Essent Group Ltd.: 11.03 ➤This is a very good ratio and considering the general rules in regard to price-to-earnings ratios, this indicates a good valuation for the company all around.

18. What is the P/B-ratio?

Essent Group Ltd.: 1.41 ➤This is also a good ratio and moreover, when this ratio is compared to the book value, they seem well-priced at the moment.

19. What is the EV/EBITDA ratio?

Essent Group Ltd.: 10.75 ➤This number is more on the high side when analyzing such ratios, which could mean that a company is more expensive than it should be (valuation wise) but as it concerns Essent Group Ltd. and the industry in which they operate, this is not at all worrisome.

20. WACC?

Essent Group Ltd.: 8.63% ➤ This percentage is average, neither great nor terrible, which means that for the company this is a decent percentage being maintained, and in a resulting analysis that the firm has an average valuation.

Total Score

Essent Group Ltd.: 13/18 ➤ This is a good rate especially given the fact that Essent seems like a company with a lot growth potential. Their strong financials, economic moat, and non-financial attributes indicate that they are an interesting company to, at the least, watch for continued growth well into the future or possibly acquire as an asset for long-term portfolio growth. All in all, the fact that their stock currently seems under-valued by most metrics certainly contributes to their growth opportunity which should be alluring to any investor searching for companies that can generate and sustain stable, consistent, and long-term growth.

All the information provided is personal opinion and not directly applicable financial advice. I have no ties to the above company and am not being compensated on their behalf for the writing of this analysis. You should make your own decisions based upon evidence and what you believe is best for you and your financial well-being i.e., conducting your own due diligence.

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