For months, PHH Corporation (PHH) has been trying to determine what the company’s future will look like. The company’s mortgage business wasn’t performing and it was dragging down the company’s earnings.
Reports surfaced in October that the company was considering a split of its fleet management and mortgage operations divisions. 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, the company’s CEO Glen Messina said that the company was continuing to explore “a separation or sale of our businesses.”
On Monday, the company decided to bite the bullet and agree to a sale of its fleet management business to Element Financial Corporation for approximately $1.4 billion in cash.
When the sale was announced on Monday, Messina said the company is confident that the company has the right strategy in place to “respond to changing mortgage market dynamics and sustain a leading position in the mortgage industry.”
Messina may be confident of the company’s future, but analysts are split on what the impact of the sale will be. Analysts from FBR Capital Markets say that PHH’s decision should please the company’s investors. “Any move by the company to reduce its high-costing debt and/or manage excess capital should be well received by investors,” FBR’s analysts said.
On the other hand, analysts from Compass Point Research and Trading downgraded PHH from “buy” to “neutral” and reduced its target price from $28 to $26.
FBR reiterated its “outperform” rating for PHH and set a target price of $28. As of 10:55 a.m. EDT on Tuesday, PHH was trading at $23.63, which is down $1.64 for the day.
FBR’s analysts note that the company’s mortgage business will continue to “lose money given the tough origination environment.” But the analysts also expect PHH to realize an after-tax gain of between $250-300 million from the sale of the fleet business. “We expect management will use this cash to de-lever, repurchase stock, and/or pay a special dividend,” FBR said. “How and when the company uses this excess cash will be important, but nonetheless we view the outcomes as favorable in the long run.”
“The total net proceeds generated from the sale are in-line with our expectations, but the net gain on sale of $250-300 million was lower than our expectation by roughly $100 million,” Compass Point’s analysts said.
Compass Point’s analysts expect that PHH will use the newly available funds to buy back stock, pay dividends, prepay debt, or increase correspondent originations. “However, the deployment of available cash will not be enough to push earnings high enough to justify a valuation multiple at tangible book value, and we do not expect a takeout of the mortgage business in the near-term,” Compass Point said.
“One of the main reasons to own the stock would be to realize the value in both the fleet AND (emphasis is Compass Point’s) the mortgage segments,” the analysts said. “The best-case scenario for PHH would be to sell the company. We believe an acquirer would have the capacity to make significant expense cuts and drive significantly higher earnings compared to what PHH is doing right now.”