Monday, August 26, 2013

Investing in US Mortgage Profits

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As a result of excellent second quarter results, earnings estimates have been rising for Nationalstar Mortage Holdings (NSM), sending the stock back to Zacks Rank #1 (Strong Buy).

About the Company

Based in Lewisville, Texas, Nationstar is one of the leading residential mortgage services companies in the U.S., with a servicing portfolio of $312 billion. The company offers servicing, origination, and real estate services to financial institutions and consumers.

Excellent Results for the Second Quarter

On August 6, 2013, Nationstar reported its second quarter 2013 results. Pro-forma earnings for the quarter came in at of $1.50 per share substantially ahead of the Zacks Consensus Estimate of $0.97 per share.

Earnings were up in comparison to both the prior quarter pro forma earnings of $0.85 per share and Q2 2012 pro forma earnings of $0.44 per share.

Total revenues came in at $603.7 million, up 40% from the prior quarter and up 198% from the second quarter of 2012. Total originations during the quarter surged to $7.1 billion, up 109% from $3.4 billion in the first quarter.

Pro forma servicing portfolio stood at $435 billion and the bulk acquisition and flow pipelines grew to the $400 billion during the quarter.

Strong results for the reported quarter were primarily a result of higher volumes, lower original expenses and the company’s focus on high margin channels. During the quarter, Nationstar completed the acquisition of the mortgage origination business of Greenlight Financial Services for $75 million. The company expects Greenlight to originate more than $8 billion annually.

The management reaffirmed its guidance for FY 2013 at $4.05–$4.75 per share and for FY 2014 at $6.45–$7.50 per share.

Positive Earnings Estimates Revisions

As a result of excellent results, analysts have been revising their estimates for current quarter and the fiscal year 2013. Zacks consensus estimates for the current quarter and the current year have increased to $1.25 and $4.63 per share respectively, up from $1.23 and $4.39 per share, 30 days ago. The company has delivered positive surprises in each of the last four quarter—with an average surprise of 21.75%.

Solid Industry Outlook

Mortgage servicing industry stands to benefit from the improving economy and the healing job market. As the economy improves and rates rise, prepayments slow down extending the cash flow of servicing assets. NSM had acquired a large amount of mortgaged assets over the last 3 years at very low acquisition multiples. The company expects the value of these assets to appreciate as the economy improves.

Lower unemployment leads to a reduction in portfolio delinquencies, servicing costs and advance balances.

Further, a number of large financial institutions have recently announced that they intend to explore the sale of additional servicing assets. According to NSM’s management, this trend bodes well for Nationstar and will undoubtedly allow them to continue to grow their platform.

The Bottom Line

NSM is a Zacks Rank#1 (Strong Buy) stock. It also has a longer-term Zacks recommendation of “Outperform”. Further with an improving outlook for the mortgage servicing, this stock should be a solid pick for your portfolio.

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