Essent, which offers credit protection to lenders and mortgage investors, trades at nearly 10 times one-year forward earnings, more expensive than peers such as MGIC Investment, NMI Holdings and Radian, all of which are pegged at 8 to 9 times one-year forward earnings.
Essent's trajectory has been a meandering path, hitting both highs and lows.
Although Essent's management is ready to keep the momentum going, this specialty finance company isn't really an attractive long-term proposition at these prices.
Granted, this has been a recovery year for Essent, but then most of that ascent is behind it.
The landscape for the business as a whole has undergone a transformation. After 2008's housing crisis, underwriting standards are now stringently crafted, making new, emerging businesses acutely aware of the risks and well-managed.
The default rate in the private mortgage insurance industry is low, even as pricing concerns are pushing companies to cut rates in a bid to garner market share.
Trimmed of excess, the segment seems stable and secure. However, recent transactions highlight Essent's inevitable plateau.
When that firm applied the same multiple to 2018 earnings estimates for Essent, the upside was just 5%.
Bigger potential gainers are as MGIC Investment, NMI Holdings and Radian, where investors stand to receive upside of 30% to 60%.
Essent could obviously receive higher multiples than sluggish rivals, with a valuation that already factors in the fast-growth promise.
In fact, the more diversified Genworth is trading at 5.33 times forward earnings.
In fact, Essent's golden run may now be at a close.
The nine analysts offering 12-month price forecasts for Essent have a median one-year price target of $29, which would represent a less than 9% increase. Meanwhile, Essent's peers have price targets representing gains of 15%-plus for MGIC Investment and 18%-plus for NMI Holdings and Radian.
Although the business model is stable, competition and Essent's rich valuation will eventually have a downward effect on the stock price.
But Essent's business remains strong, so investors could profit short term by buying on the dips.
As we've just explained, Essent could be running out of steam. If you're looking for much better growth opportunities, we've found a genius trader who turned $50,000 into $5 million by using his proprietary trading method. For a limited time, he's guaranteeing you $67,548 per year in profitable trades if you follow his simple step-by-step process. Click here now for details.