Bear of the Day: PHH Corp (PHH)


May 16, 2013 |

Declining revenues and an industry under pressure are not the descriptors you want to hear just before you invest in a company, but unfortunately PHH Corporation is experiencing both at the moment.

In its last earnings report, PHH reported a 6% decline in net revenues overall along with a decline in several of their business metrics that helped drive core earnings per share 77% lower versus the same period a year ago.

Earnings Struggles
PHH is unique in that it offers both outsourced private-label mortgage solutions (originations mostly) and fleet management (two very different businesses) with over 580,000 automobiles and trucks under management in both sales and service fleets.

The mortgage side is struggling a bit as pre-tax core earnings for the combined mortgage production and servicing segments was a loss of $3 million for the first quarter, down from $45 million in pre-tax core earnings in the fourth quarter of last year.

PHH’s total loan servicing portfolio of $182 billion was down 2% from the first quarter of 2012. The company also stated that the capitalized portion of their loan servicing portfolio totaled a $137 billion in UPB at the end of the first quarter, down 9% from the first quarter 2012 primarily due to a reduced replenishment rate.

Their fleet business was a minor bright spot; Q1 fleet segment profit was $21 million up $1 million from the fourth quarter of 2012. Fleet benefited some higher fee income and an improved cost of funds, partially offset by lower syndication volume and remarketing gains.

Even with the slight increase in year over year profits in the fleet division, the company expressed concerns over future growth in light of economic conditions.

Shares of PHH have been in a bearish channel since topping out around the $24 dollar mark in late January, 2013.   Analysts have also been in their own “bearish channel” of sorts, dropping FY2013 estimates down $1.15 or 415 to $1.65 and FY2014 estimates down by 15% to $2.44 in the last two months alone.

ESPs are generally flat which doesn’t bode well for their upcoming earnings surprises and FY2014 ESPs are negative, which could mean that there is more room for those estimates to fall.

A stagnant economy and increasing interest rates on the horizon doesn’t bode well for a company that depends on the opposite to thrive.  Increased competition in the mortgage origination business is also a factor.

While all hope is not lost and 13 times forward earnings doesn’t seem all that high, a couple downward revisions and a blip in the housing market could send this stock’s shares further.

If you are on the hunt for a mortgage company, you might check out Nationstar Mortgage (NSM - Free Report) with a Zacks Rank of 1 or on the fleet management / logistics side, research Ryder System Inc (R - Free Report) , which carries a Zacks Rank of 2; both should be a better bet at the moment.

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