. is currently on a wild ride. Investors should wait for it to achieve a stable altitude.
The recently listed mortgage giant’s shares have been zooming back and forth around its late-Wednesday earnings report, which is odd given that many numbers had already been telegraphed by prior disclosures. The stock was up as much as 12% Wednesday, and then down as much as 18% on Thursday.
The company gave a third-quarter production outlook of around $82 billion to $85 billion of closed loan volume that is very strong—but in line with what some analysts were already expecting given the current mortgage boom. The company also gave an outlook for its gain-on-sale margin, a determinant of revenue, to moderate from 5.19% in the second quarter to under 4.3% in the third. That is what would be expected with narrowing spreads between Treasuries and mortgage rates.
What matters to Rocket’s stock will be the longer-term trend, namely whether it can make progress on its goal of moving from its leading but still single-digit share of mortgage lending to a 25% share by 2030. One thing that will be key is cheaply retaining borrowers when they refinance. An important part of the “tech” in the “fintech” thesis is that Rocket can do this with digital customer service and outreach. It also needs to develop its partner ecosystem to acquire customers ever more efficiently as the market shifts from refinancing to more homebuying.
Already, Rocket is priced for significant progress. Going into Wednesday’s report, Rocket was trading at a multiple of over 20 times expected 2022 earnings, according to FactSet. It is down to about 18 times after Thursday’s trading. That is still quite rich in the land of mortgage lending. Mortgage-heavy banks average around eight times, according to analysts at UBS.
PennyMac Financial Services,
another nonbank mortgage producer, trades at around five times. Big gain-on-sale-based mortgage lenders like
also traded around eight times, according to Autonomous Research. Rocket now sits between lenders and pure tech firms like mortgage software and data provider Black Knight, which trades over 30 times.
Certainly, Rocket has a leading brand, market share and history of technological innovation in mortgages that could help it take share and compensate for outside revenue pressures from falling volume and spreads. That deserves some premium to peers.
But there are also a lot of big shifts happening in the economy and mortgage business that ought to be reflected in its multiple, too. Continuing delinquencies after the end of forbearances could put liquidity pressures on servicers like Rocket. The transformation of
may cause further disruptions to the mortgage market generally.
There is also a risk that investors get ahead of themselves betting on Rocket’s vision for becoming “the
for financial services,” as the company has put it. That effort is still in the early stages.
Evidently, investors seem confused how to value this company. The debate may rage for a while, as it is the further-out future that matters most. This ship’s crew should be ready to endure some intense G-forces for some time yet.
Write to Telis Demos at firstname.lastname@example.org
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8