Sterne Agee raises estimate and price target on Altisource Portfolio Solutions

Elimination of unproductive costs “noteworthy”

Sterne Agee analyst Henry Coffey is raising the estimate on earnings and price target on Altisource Portfolio Solutions (ASPS) after seeing the company’s first-quarter results posted Thursday.

“The level of unproductive cost at ASPS, and its elimination due to actions taken in 1Q15, are both noteworthy,” Coffey says in a client note. “This, combined with expected seasonality, should results in a pattern of sequentially improving EPS over the next 2-3 quarters, higher long-term EPS, and enough cash flow over the next 4-5 years to pay off its term debt.

“We are increasing EPS as reflected below and raising our price target from $15.50 to $17.00,” Coffey says.

ASPS reported 1Q15 adjusted EPS of $0.56 per share vs. $1.97 in the year prior quarter. Excluding severance cost and a reported impairment loss on Home Loan Servicing Stock, which combined totaled $7.8 million, operating adjusted EPS of $0.90 was above our expectation of $0.78 per share. The stronger than expected operating results reflect higher than expected mortgage servicing revenue offset in part by higher interest expense, Coffey says.

In the March quarter, the company took two steps that should lower direct cost and improve gross margins associated with the $4.5 million in severance cost. Of that, $4 million was reported in direct cost. This brought total eliminated overhead to  $5.8 million.

"We estimate that in excess of $5.1 million of this was reported in direct cost," he says.

Second was the cancellation of a "Data Access" contract with Ocwen which in the first quarter cost ASPS $10.3 million. The combined impact of these (severance, eliminated cost, canceled contract) equaled 10% of 1Q15 revenue or $0.90 per share.

“The elimination of unproductive overhead should have a significant impact on EPS during the remainder of 2015,” Coffey says. “The company indicated that it expects full-year 2015 results to come in line with the average of its two guidance scenarios which implies adjusted 2015 EPS of $6.18 per share. Our own analysis suggest the following: 2015-an increase in adjusted EPS from $4.73 to $5.25, 2016-increase adjusted EPS from $4.55 to $4.75. 2017-Increasing adjusted EPS from $3.75 to $4.30. Our price target is based on our long-term earnings / operating cash flow outlook.”

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