KBW upgrades Nationstar on second look at MSRs

Sterne Agee lowers FY2014 EPS estimate

Nationstar Mortgage Holdings (NSM) is getting a little more love after its rough time last week following its announcement of declining revenue for the third quarter.

Boutique investment bank Keefe. Bruyette & Woods downgraded Nationstar to “underperform” in October on the pricey valuation amid slowing mortgage servicing rights acquisitions, but on Monday KBW announced it is rethinking its evaluation of acquisition volume.

As a result, KBW is upgrading Nationstar to “market perform.”

On Friday, Wells Fargo (WFC) took a second look and they’ve upgraded their recommendation from sell, moving it up from “underperform” to “market perform" because they know that despite the challenges, this may be the bottom.

In the long term, Nationstar is still picking up MSRs, and few other institutions could handle — or want to handle — these rights.

All of the major mortgage nonbanks faced a challenging year for a variety of reasons, but Nationstar weathered the worst of its storms without facing the additional headwinds similar nonbanks like Ocwen Financial (OCN) have. 

Sterne Agee analyst Henry Coffey, meanwhile, said the firm is lowering its EPS estimate for FY 2014 from $3.78 to $3.12 to reflect 3Q14 results and lower expectations for the origination business and Solution Star.

“In addition, we are reducing our FY15 and FY16 EPS estimates from $4.88 to $4.50, and from $5.25 to $5.00, respectively,” Coffey said. “The company indicated that it expected servicing balances to increase by ~10%, is targeting retail mortgage volumes of $13 billion, and expects (Solution Star)’s contribution to increase by 30%. In aggregate our estimates are being driven by more conservative assumptions than this.”

Despite the upgrade, Nationstar was down more than 5% at 1 p.m. ET.

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