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On Aug 26, 2013, we reiterated our long-term recommendation on Ocwen Financial Corp. (OCN - Analyst Report) at Neutral based on its new business acquisitions and improved second- quarter results. However, we remain concerned about the company’s mounting expenses.

Why the Neutral Stance?

Ocwen’s second-quarter 2013 adjusted earnings came in at $1.02 per share, marginally ahead of the Zacks Consensus Estimate of $1.00 and substantially up from the prior-year quarter figure of 33 cents. Results benefited from impressive top-line growth, partially offset by increased operating and interest expenses. Moreover, improved balance sheet and liquidity were the tailwinds.

The Zacks Consensus Estimate for 2013 went down by 13.5% to $3.59 in the last 30 days. However, for 2014, the Zacks Consensus Estimate went up 3.5% to $5.65 per share over the same time frame. The company currently has a Zacks Rank #3 (Hold).

Over the last few years, Ocwen has been expanding through acquisitions, mergers and alliances. Further, Ocwen’s growth plan is focused on core operations, increasing fee-based revenues, intensifying unsecured debt collection business and diversifying its business through new ventures such as outsourcing.

Alongside, Ocwen is focused on developing its Servicing segment by expanding the segment’s capabilities through reverse mortgages and home equity lines of credit.

All these factors are expected to improve the company’s revenue generation capacity in the long run.

On the other hand, owing to its acquisitions, Ocwen is encountering adversities like several one-time expenses and allocated burden of probable losses incurred by the companies purchased as well as complex and prolonged integration processes. Additionally, interest expenses are expected to rise based on increasing funding requirements. This is anticipated to pressurize the company’s bottom line in the near-to-medium term.

Moreover, a sluggish economic recovery, surge in expenses and new regulations are expected to adversely affect the financials of the company going forward.

Other Stocks to Consider

Some better performing stocks in the financial sector include First Interstate Bancsystem Inc. (FIBK - Snapshot Report), Firstbank Corporation and Mercantile Bank Corp. (MBWM - Snapshot Report). All these carry a Zacks Rank #1 (Strong Buy).

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