From 2014 to 2018, revenue grew at an annual rate of 10.2%. New management has come in and restructured operating costs resulting in a return on equity that stands at an enviable 16%. Given the increase of first-time homebuyers—think more than 90 million Millennials entering the ranks of homeowners—and mortgage rates hovering near two-year lows, we believe the good times should continue for Radian.
Management’s history of insider buying over the past few years, an aggressive share repurchase program, and the company’s strengthened balance sheet all bolster our confidence in Radian. Shares continue to trade at just 1.3x book value and only 8.0X earnings (a 12% earnings yield), despite our view that earnings and book value should grow at a high single-digit pace.
As investors continue to scramble for income in a low-rate environment, some traditional high-yield areas like Utilities have become increasingly expensive. The challenge for value investors is to find differentiated business where the market is overlooking or misunderstanding a compelling opportunity.
Vistra Energy Corp. (VST) is a prime example of what our bottom-up research approach has unearthed. This independent power producer provides retail electricity and wholesale power generation to the unregulated utility markets. New management and a restructured balance sheet have enabled the company to reduce debt while producing substantial free cash flow.
Vistra should have excellent visibility in producing free cash flow due to it combination of retail and wholesale business, along with its use of hedging to mitigate volatility in gas and electricity exposure.
We’ve been impressed with leadership’s ability to pay down debt and its shareholder-friendly actions including initiating a dividend this year and buying back $1.1 billion—or approximately 8%—of shares outstanding. Trading at just 6.1X enterprise value/earnings before interest, taxes, depreciation, and amortization (EBITDA), and with an equity free cash flow yield of 18%, Vistra’s shares, in our view, offer a compelling opportunity. We are further encouraged by significant recent insider buying.
Communication is key
Calix, Inc. (CALX), a communications equipment and services provider that also offers cloud-based data analytics capabilities, is another holding where management’s enthusiasm seems to mirror ours. We took a stake in the company earlier this year after shares came under pressure due to an isolated loss of a customer and some temporary issues tied to a shift in suppliers.
We take a longer view of company prospects and see a compelling opportunity. Calix is in the process of fundamentally transforming its business model. Early results have been promising as margins have expanded and the company has seen steady high single-digit growth in bookings.
Importantly, new platform sales products are expected to reach roughly 75% of total sales by the end of 2019 and are growing at a double-digit rate.
Despite the promising outlook, Calix trades at only 7.4X 2020 estimated EBITDA—less than half the multiple enjoyed by its peers. Our confidence in the investment is further bolstered by knowing that management has purchased more than 350,000 shares in the business valued at $2.6 million during the past year.