Compass Point: Expect things to get worse for Ocwen

Shrinking servicing portfolio will lead to scant profits

As it turns out, there may not be a light at the end of the tunnel for Ocwen Financial (OCN), which saw its stock price take a beating last week in the wake of seeing its income from operations in the second quarter fall nearly $100 million from last year.

On Thursday, just before Ocwen released its second-quarter financial results, the nonbank’s stock closed the day’s trading at $11.76, its highest closing price since Jan. 12.

But in the wake of those second-quarter results, Ocwen’s stock plummeted in Friday’s trading, closing down 28.32% for the day. The stock was up slightly Monday, but Tuesday is shaping up to be another rough day for Ocwen.

As of 12:57 p.m. Eastern, Ocwen is down 6% for the day, to just under $8 per share.

And according to a note from Compass Point Research & Trading, things are not going to get any better for Ocwen any time soon.

In fact, Compass Point dropped its price target from $6.50 to $6.00 and reiterated its position that Ocwen is a “sell.”

Compass Point’s previous price target of $6.50 only stood for a couple months, as Compass Point analysts Kevin Barker and Jesus Bueno dropped their target on Ocwen from $7.00 to $6.50 in May

Now, Barker and Bueno are dinging Ocwen again, saying the nonbank will struggle to make a profit for the foreseeable future.

Barker and Bueno’s expectation is for Ocwen to report operating losses for the “next several quarters,” basing that prediction on Ocwen taking an estimated $200 million in regulatory and litigation charges in the near-term.

“Longer-term, we still believe Ocwen could incur around $500 million of (litigation and regulatory) charges, but that amount of charges would likely be spread over several years,” Barker and Bueno write.

Barker and Bueno attribute Ocwen’s recent stock plunge to Ocwen announcing a plan to cut $150 million in expenses, while the market consensus was expecting a cost-cutting plan of between $300-$600 million instead.

“Considering the average servicing portfolio is likely to decline approximately 30% from 2Q15 to FY16, we believe Ocwen is likely to report more than $150 million of cost savings, but we still struggle to see how the company will report a profit even if run rate expenses decline by $300 million,” the analysts write.

Impacting Ocwen’s profitability will be its margins, which Barker and Bueno expect to shrink despite Ocwen’s cost-cutting plan.

Barker and Bueno say that they expect Ocwen’s overall servicing portfolio, which already decreased from $382 billion in the first quarter to $322 billion in the second quarter to, to drop even further to $230 billion by the end of 2016.

And with Ocwen’s required compliance with a $150 million settlement with the New York Department of Financial Services and other increased regulatory scrutiny, its servicing expenses will be elevated for the next several quarters, the analysts say.

Those expenses should decrease in time, but the analysts believe that Ocwen won’t be in a position to earn a profit until 2017, at least.

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