2 stocks making money from mortgage mess
Altisource and Ocwen are actually profiting from the dire state of the US housing market.
By Phillip Van Doorn, TheStreet
Altisource Portfolio Solutions (ASPS) is in the sweet spot, at the forefront of helping mortgage lenders and servicers minimize losses and maximize their recoveries on repossessed real estate.
The company -- headquartered in Luxembourg and spun off from subprime mortgage servicing specialist Ocwen Financial (OCN) of Atlanta in August 2009 -- was recently described by Doug Kass on Real Money as "uniquely positioned and has an insurmountable market lead against others that want to enter the field, as Ocwen has been on an acquisition binge."
And that was before Altisource reported a 75% year-over-year increase in third-quarter net income available to common shareholders of $17.2 million, or 67 cents a share. Gross profit -- revenue less the cost of revenue -- totaled $73.4 million, increasing 50% from a year earlier.
Altisource operates in three segments, including Mortgage Services, which provides outsourced mortgage loan servicing for the entire lifecycle of mortgage loans, to mortgage originators and loan servicers.
The main customer for the Mortgage Services segment is Ocwen, which has made several recent large servicing portfolio acquisitions, including its purchase of Litton Loan Servicing of Houston in September from Goldman Sachs (GS), for $247.2 million. The Litton acquisition included servicing rights on "approximately 245,000 primarily non-prime residential mortgage loans with approximately $38.6 billion in unpaid principal balance."
Ocwen agreed on Oct. 19 to purchase Saxon Mortgage Services from Morgan Stanley (MS) for $59.3 million, in a deal expected to close during the first quarter of 2012. Ocwen will take on the mortgage servicing rights for a loan portfolio with an unpaid balance of $26.6 billion.
Within the Mortgage Services segment, Altisource focuses on key aspects of the foreclosure and recovery process, including document preparation, title searches, appraisal, property preservation, repossessed property brokerage, and insurance claims processing.
Through its Financial Services segment, Altisource provides unsecured asset recovery services. The company's Technology Services segment provides "modular, comprehensive integrated technological solutions for loan servicing, vendor management and invoice presentment and payment as well as providing infrastructure support."
Doug Kass late in October called Altisource "among the best-performing stocks extant," and the shares were up 49% year-to-date, through Wednesday's close at $42.89.
PiperJaffray analyst Michael Grondahl rates Altisource "Overweight" or "Buy," with a price target of $46.40, and said in an Oct. 27 report after the company announced its third-quarter results that with Altisource only booking $2.2 million in third-quarter revenue from Ocwen's acquisition of Litton, and with large numbers of Litton and Saxon loans to be boarded during the fourth quarter and first quarter of 2012, "the revenue environment looks strong," and the "outlook is very robust."
Grondahl estimates that Altisource will earn 70 cents a share during the fourth quarter, for full-year earnings of $2.46, followed by EPS of $3.44 in 2012. The analyst expects the company's top-line revenue to increase to $542.3 million in 2012 from an estimated $403.4 million for all of 2011.
The shares trade for just under 12 times the even more aggressive consensus 2012 earnings estimate of $3.63, among analysts polled by FactSet.
Altisource's shares are cheaply priced for a company with rapidly expanding revenues in one of the few segments of the U.S. economy that is clearly growing, and with Ocwen's major acquisitions feeding further growth, it's not too late to jump in.
Ocwen's stock has also performed quite well in a punishing year for most financial names, with shares rising 37% year to date, to close at $13.07 Monday.
Ocwen primarily services subprime mortgage loans, but is also works with commercial real estate loans. The company's serviced residential loans had a total unpaid balance of $106.1 billion as of Sept. 30.
The company earned $20.2 million during the third quarter, or 20 cents a share, when it incurred $18.7 million in expenses from the Litton acquisition. That compares to a loss of $8.8 million in the third quarter of 2010, when the company incurred $33.9 million in expenses related to its acquisition of HomeEq and $20.1 million in litigation expenses.
Top-line revenue increased 29% year-over-year to $122.9 million in the third quarter.
Sterne Agee analyst Henry Coffey rates Ocwen a buy with a $17.50 price target, saying in a report after the third-quarter results were announced that the coming acquisition of Saxon will cover "all of the growth we have been projecting for 2012."
Coffey added that his firm had identified "approximately $170 billion in potential servicing (unpaid principal balance) acquisitions/transfers, and the company indicated its pipeline of deals under review has increased to $300 billion."
The analyst estimates that Ocwen's 2012 operating income will be $1.60 a share, increasing from 2011 operating EPS of $1.12.
Ocwen's shares trade for just under 10 times the consensus 2012 EPS estimate of $1.48.
All four analysts covering Ocwen rate the shares a buy.
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