Nationstar (NSM) Offers a Compelling Investment Opportunity
Hayman believes that Nationstar Mortgage Holdings Inc (NYSE:NSM) offers a compelling investment opportunity as misinformation has created a divergence between perception and reality. It has been clearly demonstrated over the last several years that non-bank servicers, such as Nationstar and Ocwen Financial Corp (NYSE:OCN), have had more success than the banks helping families remain in their homes which has benefited homeowners, investors and taxpayers alike. The success of the non-bank servicers is demonstrated by the fact that they have far fewer customer complaints per delinquent loan than the large bank servicers (see chart below). Nationstar has a long history of reducing delinquencies by providing solutions to troubled borrowers.
The banks are jettisoning portions of their mortgage servicing businesses in part due to increased capital requirements (driven by Basel III), but also because they are not fundamentally positioned to service high-touch portfolios. Of the $10 trillion U.S. mortgage market, more than 80% of the loans are still being serviced by the banks and the tailwind remains for additional transfers from bank to non-bank servicers. Over the last several years, Nationstar has invested heavily in infrastructure and personnel to scale their platform. The company is now in a great position to reap the benefits of these investments and grow servicing profitability in 2014 and beyond. Via: HVST.com
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Sterne Agee analyst, Henry J. Coffey, Jr., looks at today’s Nationstar Mortgage Holdings Inc (NYSE:NSM) volatility and says the rally in Nationstar, Ocwen Financial Corp (NYSE:OCN), and Walter Investment Management Corp (NYSE:WAC) shows how heavily oversold the stocks are.
Estimates for Nationstar’s EPS reduced
We are reducing our 2014 and 2015 EPS estimates to reflect a lower starting point on servicing balances ($391 billion), as well as expectations regarding servicing and origination profitability and volumes for FY14 and FY15. We are lowering our price target from $33 to $30.
4Q13 Nationstar Mortgage Holdings Inc (NYSE:NSM) reported GAAP EPS of ($0.56) vs. $0.91 in the year-ago quarter. Core or operating results reflected a loss of $0.55 per share. Core EPS exclude $51.3 million in cost related to items such as severance, the write-off of deferred loan fees, and other items, as well as +$49 million in fair value marks taken against its mortgage servicing rights (MSRs).
Servicing and origination
The company ended the year with $391 billion in servicing and originated $5.5 billion in mortgage during the quarter. Excluding fair value marks and one-time items, the company indicated that its servicing operation generated pretax earnings equal to 6 bps of average servicing. The mortgage operation reported a pretax loss of $142.5 million due to disruptions in volume related to the sale/closing of its wholesale operations and an unusually low reported gain on sale. In January, priced in margin on retail originations equaled 4.00% of locked volume.
We are lowering our 2014 EPS estimate from $4.20 to $3.80 and reducing our 2015 EPS estimate from $5.00 to $4.50. The lower FY14 estimate reflects a lower starting point on servicing balances, the amortization of 4Q13’s higher MSR, and adjustments in expected overhead from the mortgage operation. We are estimating a pretax margin on servicing consistent with the company’s stated outlook (11 bps of servicing balances). We have factored expected sales of servicing advances but not the full use of what amounts to approximately $1 billion in available cash.
Our price target for Nationstar Mortgage Holdings Inc (NYSE:NSM) is based on our sum-of-the-parts or line-of-business model, which places a separate valuation on the company’s three primary business lines: mortgage origination, servicing, and its ancillary services business, Solutionstar (S*). The reduction in price target reflects our lower estimates as well as a contraction in the price earnings ratio (PE) applied to S*.