Ocwen and Nationstar Earnings

Austin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Ocwen Financial Corp (NYSE: OCN) announced their quarterly earnings last week at a solid $0.47 per share. This represents an increase of 67% in adjusted earnings from the same time last year. Unfortunately, they missed Wall Street estimates of $0.50 earnings per share. 

Ocwen provides loan servicing for mortgages, as well as asset management in the United States and abroad. They manage residential assets and are engaged in the investment of subprime loans and the trading of mortgage backed securities. 

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The company’s share price is up 146% for the last twelve months thanks largely to their growing earnings. They have had a recent pull-back as some investors took their profits.

While Ocwen did miss the average earnings estimate, there were some other highlights. 

  • 2012 revenue was $841 million which is a 70% increase over 2011
  • Operating income grew by 87%
  • Cash flow from operations was $1.8 billion for the year

At the end of fiscal year 2012, Ocwen purchased Homeward Residential which is now a part of a Department of Justice investigation on mortgage modifications.  This was announced on March 1.

Ocwen also purchased a $2.1 billion servicing business from Ally Financial called Residential Capital. This closed on Feb. 15 and was not included in their earnings. 

After the two new additions, Ocwen’s servicing portfolio is over $460 billion.

Ocwen's stock price has been steadily increasing--does this signal an improvement for mortgage servicing companies? While Ocwen is in the savings and loan industry, their core business revolves around mortgages and loan servicing. 

Nationstar Mortgage Holdings Inc. (NYSE: NSM) posts earnings this week. Nationstar is a mortgage servicing company and writes loans for residential mortgages. It went public last March and has had decent earnings since then.

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The expected Q4 EPS is $0.69, which is a 13% increase from last quarter.  This puts the 2012 annual earnings at $2.38 per share. For fiscal year 2013, earnings are expected to be $3.93 per share.

Using the current P/E, this company is expected to trade at $95.93 from the current $39.23.  When looking at the P/E of companies roughly their size, the value jumps to $216 per share! Obviously, this is a drastic price increase that isn’t expected. So another form of valuation must be used.

Capitalizing their earnings at a discount rate of 9% puts the company’s stock price target at $43.67 for 2013.

The company will have to watch out for their rising expenses. Selling, general and administrative expenses have risen each quarter this year for a total increase of 65.9%. Total operating expenses have risen 60% from Q1 this year.

Watch for good earnings but be weary of rising expenses.

Nationstar has a $215 billion loan servicing package from Bank of America (NYSE: BAC), which has increased their entire portfolio to $425 billion. The $215 billion valuation is based on the principle remaining on the sum of the loans. The sale price of this was $1.5 billion. This is not a new practice in the banking industry. The loan servicing arrangement has Nationstar performing all of the administrative work involved with collecting the payments. In exchange, Bank of America pays a small percent of the interest collected on the loans. This allows Bank of America to collect payment without doing any work. With new capital regulations, it has become too costly for Bank of America to originate and collect payments on its loans. This high cost coupled with mortgaged-based litigation in the past makes servicing a major challenge for the bank. Offloading this practice continues to reduce Bank of America's liability and allows them to focus on higher revenue generating practices with less financial risk.

There are more opportunities for loan servicing purchases and sales. Both Wells Fargo and JPMorgan Chase could very well sell their loan servicing programs. Both Nationstar and Ocwen could benefit from these future opportunities.

Austin Higgins is the Principal Consultant for Build. Invest. Grow. and focuses on building businesses through innovation, growth and investment. Learn more at BuildInvestGrow.com and follow him on Twitter @Austin_Higgins. 

higginsaustin has no position in any stocks mentioned. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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