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Investments

PHH mortgage business set to revive after fleet sale

FBR reiterates outperform rating

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PHH Corporation (PHH) is standing in a strong financial position following the completion of the sale of its Fleet Management Services business, prompting FBR Capital Markets to reiterate its outperform rating on the company’s stocks.

“To that end, the company will use the net proceeds of the transaction to reinvest in the business to streamline its overall operations and strengthen its existing mortgage business, de-leverage its balance sheet, and repurchase shares,” FBR said.  

“We continue to believe that the next steps for the company are renegotiating its PLS contracts, managing expenses, and lowering its cost of capital in the mortgage segment. In our view, these are essential in order for PHH to generate sustained profitability,” FBR continued.

Rumors that the company was considering splitting up its mortgages and auto fleet business started sprouting up back in October.

The company’s mortgage business continued to decline through the end of 2013, and the company posted a loss of $42 million in the first quarter of 2014.

When the company released its first quarter earnings, its CEO Glen Messina said that the company was continuing to explore “a separation or sale of our businesses.”

Finally, at the beginning of June, the company decided to sell its fleet management business to Element Financial Corporation for approximately $1.4 billion in cash, which is expected to generate $821 million in net proceeds.  

With the newfound cash, the company will repurchase $450 million of shares (including $200 million in an accelerated program), redeem its 2016 9.25% senior notes and reinvest $350 million in the company to reorganize operations and infrastructure as well as build out the mortgage banking and servicing segment.

When the decision was first made, analysts were divided on whether or not this was a sound idea, with analysts from Compass Point Research and Trading downgrading PHH from “buy” to “neutral” and reducing its target price from $28 to $26.

But this has not impacted FBR’s viewpoint. “We applaud the company's initiatives as we estimate they are accretive to book value and are the first step toward getting to sustained profitability.”

PHH held a conference call Tuesday morning to discuss the details of the transaction, with Dealreporter's Jay Antenen tweeting about management’s use of the term, “optimize operating expenses.”

Despite the recent mixed reviews, PHH shares opened Tuesday after the official sale at $24.75 a share and is up 4.24% midmorning and up 14.53% year-over-year. 

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