Radian: MGIC Merger Looks Promising

Radian (RDN) is primarily engaged in private mortgage insurance and credit protection. The stock has been pounded in the past two weeks amidst sub-prime concern.

Last week, Radian reported weak earnings in the 2nd quarter due to higher credit losses. It is possible that the 2nd quarter was sort of a "one-off" quarter in that the company took large writedowns related to reserves for current as well as future periods.

At present they are selling at a 12% discount to book/tangible book and less than 7x trailing earnings. Radian has a conservative balance sheet and generates huge free cash flow. They have a history of aggressively buying back stock, which hopefully will continue with shares at current levels.

From 1997 to 2006, Radian grew book value per share at a rate of 19% annually.

Radian has a pending merger via stock swap with MGIC (MTG) which is a merger of equals and should be synergistic due to corporate overhead cuts. RDN is selling at better than a 5% discount to the conversion price, the deal has very few hurdles left and should close in roughly two months.

Full Disclosure: We own shares of Radian Group.

RDN 1-yr chart: