CoreLogic: Last man standing?

With a competing spin-off already returning to the mothership, CoreLogic's plan is bold: Get beyond the mortgage biz

Years ago, spin-offs reigned supreme in the U.S. mortgage industry. In late 2008, Fidelity National Information Services Inc. spun off its residential property analytics and mortgage services unit into Lender Processing Services. And in 2009, Ocwen spun off Altisource Portfolio Solutions to offer many of the same types of mortgage services. Then, in 2010, First American Financial Corp. spun off CoreLogic — capturing its data, analytics and mortgage services into a separately traded entity. 

Today, the industry landscape looks vastly different: Ocwen’s various (and numerous) spinoffs — including Altisource — are the subject of harsh scrutiny from banking regulators, while Lender Processing Services is no more and has been spun back into the Fidelity title insurance empire. 

But CoreLogic still stands alone. And until recently the company had been a darling of Wall Street, too, consistently beating analyst estimates for both revenue and earnings quarter after quarter for nearly two years. 

That all changed quickly in the back half of 2013. After seeing revenues decline in the third quarter, the company posted a surprise earnings and revenue miss during Q4 amid a sharp decline industry-wide in mortgage origination volumes. The company’s stock swooned more than 12% in one day on the news. 

Fourth quarter revenue at CoreLogic totaled $311.9 million, a 6.6% decline from one year ago, while operating income from continuing operations saw a whopping 53% drop in the same time frame to $21.6 million. 

With mortgage origination volumes expected to reach what may be a 20-year low in 2014, is now the time to bet on a company whose revenues are historically tied to mortgages? 

THE BEAR CASE 

Reasonable logic says now isn’t the time to place any bets on CoreLogic, until the company proves it can successfully operate in a down mortgage environment, or pivot its business beyond it. There are two main reasons why this is true. 

First, revenues for CoreLogic in the fourth quarter might have been worse than the 6.6% decline the company actually posted: earlier acquisitions softened the blow here, although by how much it’s tough to say. The company doesn’t disclose figures for individual business units (conveniently?). 

We do know that CoreLogic was highly active in acquisitions last year: the company acquired Marshall & Swift/Boeckh (MSB), DataQuick Information Systems, and the credit and flood services operations of DataQuick Lender Solutions in July 2013. And also in July, CoreLogic purchased the flood zone determination and tax processing services assets and operating platforms from Bank of America. 

The MSB acquisition is a strategic one for CoreLogic, as the company’s leadership has made it clear they intend to move their services and data offerings beyond the mortgage space into the insurance segment — and MSB is a leading provider of data to the insurance market and public sector. 

During the company’s Q4 conference call, CFO Frank Martell said that CoreLogic believes 10% of the company’s revenue in 2014 will be driven out of the insurance segment — as part of the company’s strategy to get beyond the recently sinking ship that is U.S. mortgages. 

While the MSB and DataQuick acquisitions have yet to close when this analysis was written, what we don’t know is how much of the company’s existing revenues during the fourth quarter were already outside of mortgages.

CoreLogic’s Martell did say that “acquisition-related revenue partially offset the impact of low origination volumes” on CoreLogic’s revenues during Q4 — though how much is anyone’s guess. 

Beyond M&A activity masking any larger revenue drops at CoreLogic, the second reason to hold off on the company’s shares is a little less obvious: the sleight of hand at play in the company’s financial reporting. 

In 2011, the company reported around three operating segments: Data and analytics, Mortgage origination services, and Default services.

In 2012, “Default services” became “Asset management and processing solutions” in the company’s SEC filings. Although the name changed, the numbers did not. The formerly titled default services unit drove a full 21.4% of the company’s revenue for the 2012 calendar year, down from 24.6% in 2011 and 28.8% in 2010.

In 2013, the “Asset management and processing solutions” segment disappeared altogether from the company’s financial reporting, as it was classified as “held for sale” per GAAP standards. Were it included, it’s not hard to see from the footnotes to the company’s earning report that CoreLogic would have posted a quarterly loss in Q4 2013: the AMPS business lost a whopping $42.2 million in the fourth quarter alone, enough to swamp any operating profit elsewhere in the company. 

This is a business line that was not one year ago roughly a quarter of the company’s entire revenue — and it’s now bleeding profusely. Yet thanks to the magic of accounting standards it has disappeared completely, as if it were never there. 

Almost magical, isn’t it?

It’s not exactly hard to see why CoreLogic, then, wants out of this line of business ASAP and decided to move it off of the reported P&L. 

Company executives said on their most recent earnings call they have numerous interested buyers for the AMPS business unit, but wouldn’t disclose any expected impact on sale to the company’s financials; well-worn market critics should note that businesses bleeding money tend not to fetch strong pricing on the open market.

Investors have a logical right to be nervous here. CoreLogic’s experienced executive team is putting on a brave and high-stakes show, but the company’s financials are made up of more than a few smoke and mirrors at current — and the company’s opacity relative to its various business units is a game that can only be played for so long. 

Eventually, the losses here will either show or be washed away by a successful sale of the AMPS business unit. Until then, investors would be wise to sit on the sidelines and let this play itself out.

THE BULL CASE

Yes, mortgages are declining. The business is going to get tougher going forward. But CoreLogic executives have been talking — and warning about — this exact reality for the better part of three years now.

Even better, they’ve been taking appropriate action: exiting from business lines that don’t make sense in the new mortgage world, and realizing that future profits must come from business lines that can span financial services beyond just mortgages. 

The company’s recent acquisition binge is proof positive that this management team isn’t just talking, but is taking positive action ahead of the market.

CEO Anand Nallathambi noted in the company’s Q4 earnings call that CoreLogic is already expecting mortgage originations to fall to $1.1 trillion in 2014, down sharply from $1.8 trillion the year before. It’s a reality the company has already prepared for — and indeed, a reality already reflected in the company’s forward earnings guidance, which generally projects flat revenue for this year.

“For the past three years, we have been preparing for this inevitable market shift by reshaping our revenue mix and leveraging our data assets, driving efficiency and operational excellence and building out our financial flexibility,” Nallathambi said during the company’s most recent earnings call.

The company’s data and analytics revenue are now almost nearly 45% of total revenue, up from 32% just four years ago, for one thing. 

But more importantly is this: CoreLogic grew 2013 revenue almost 8% despite an estimated 20% pullback in mortgage originations last year. Full year operating and net income from continuing operations rose 2% and 43%, respectively; while adjusted EBITDA and EPS were also up year-over-year, as the company stressed on their earnings call.

The company believes data and analytics can drive up to 50% of the company’s revenue in the coming years, while they anticipate being able to scale the company’s transaction processing services as well — much of this coming as CoreLogic increases insurance and spatial-related revenue outside of the mortgage business.

If the company is successful in turning itself into a next-generation data and services company, the market cap potential here is much larger than the $2.9 billion it currently boasts. Here’s why: the company’s price/book of 2.8x is significantly below the Morningstar industry average of 4.2x — meaning there is yet a lot of possible room to run.

While everyone else is uncertain about the future and is scared by the company’s exposure to the mortgage sector, now’s the time to use that uncertainty to your advantage and jump into the value stock now — before everyone realizes the value play and makes the same move. 

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