Mortgage

Why Jay Farner is “puzzled” by Rocket’s disappointing stock price

Despite record origination and $6.55B in profits YTD, Wall Street hasn't embraced the lender. We look at why

Jay-Farner-Quicken-Loans-HW

You can understand Jay Farner’s frustration: Rocket Companies just had the most productive quarter in the history of residential mortgage lending. It thumped competitors with a record $89 billion in originations in the third quarter, and made $3 billion in profits. In fact, through the first three quarters of the year, Rocket has made a stunning $6.55 billion in profits.

The highlights from the third quarter alone were impressive by any standard: Rocket claimed big gains in Millennial adoption of its tech platform. It also inked several partnerships that could boost its purchase business, something analysts and investors have said they want to see in order to justify long-term forecasts. And though gain-on-sale margins fell from 5.19% to 4.52%, they were still well above expectations.

Rocket announced that it would be buying up to $1 billion in common stock over the next two years, which should raise the price. Add that to a low-rate environment that is expected to continue well in 2021, and the forecasts should be quite favorable, right?

Despite all that, Rocket’s stock at the close of business Wednesday was trading at a ho-hum $21.60, slightly above the $21.50 price it closed at on its Aug. 6 debut. As of Thursday at 1:45 p.m. EST, it’s been trading around $21.76.

Farner appeared on Jim Cramer’s “Mad Money” show on Wednesday evening, where the two discussed the confounding situation.

“That frankly makes no sense to me,” Cramer said.

Farner replied: “You’ve got me puzzled too on what’s going on with the stock. We’re super excited about what we’re doing over here.”

So what explains the lukewarm response from investors?

By and large, analysts who cover the mortgage lender believe that Rocket is underpriced. The consensus price target average from 14 analysts was $26.12, according to data compiled by MarketBeat.

While Rocket showed it could deliver in a low-rate environment and flex its considerable tech muscles, investors still have questions about how it can achieve its goal of 25% market share by 2030 when market conditions change, analysts said.

“The qtr does little to resolve key debates (especially as conditions may shift), and its buyback authorization is likely a less preferred path for capital return,” Morgan Stanley analyst James Faucette wrote in a research note.

Rocket declined to tell analysts how much of its loan volume during the third quarter was purchase and how much was refinancing. That was telling, according to Jack Micenko, an analyst at Susquehanna Partners, who gave Rocket a “Neutral” rating with a fair value price target of $20 a share.

Micenko noted that Rocket’s direct-to-consumer channel comprised 64% of funded loan volume at 74% of adjusted revenue in this quarter, compared to 36% of volume and 26% of adjusted revenue from the partner channel, which skews toward purchase.

“Given that the Partner channel skews higher towards purchase and DTC more towards refi, this suggests to us that purchase mix share-take is occurring at a slower clip than market share gains in refinance volumes,” Micenko wrote. “On a Q/Q basis, things look better – Partner increased as a percentage of mix from 30% in 2Q to 36% in 3Q, and we will be looking at this figure to see if the company can make inroads in purchase market share, which we believe to be in the low single digits today.”

He continued: “And while we are able to ascertain purchase vs. refi market share to some degree using industry sources, we note that when asked on yesterday’s conference call management wouldn’t disclose refinance/purchase mix of origination, which we found surprising given that even mortgage insurance companies break out their NIW mix between purchase and refinance volume.”

Timothy Chiodo, an analyst at Credit Suisse, raised concerns about increased competition and rising interest rates in the future but also expressed confidence in Rocket’s fundamentals. “Rocket continues to win in the marketplace with a combination of technology & customer service, benefiting from industry leading retention rates (now ~4.5x industry averages),” Chiodo wrote in a note.

There are also questions about how a forthcoming vaccine for the coronavirus would affect the real estate and mortgage markets.

In a note issued on Nov. 10, Bose George of Keefe, Bruyette & Woods said in a note that he thinks Rocket is “probably the most challenged name given its large exposure to the refinance market and its relatively small balance sheet relative to its market capitalization.”

Bank of America analyst Jason Kupferberg ultimately gave Rocket a “Buy” rating.

“We think growth momentum should continue for the foreseeable future given cyclical tailwinds, RKT’s market-leading client retention rates, expansion of the partner network (volumes skewed toward purchase market), and continued growth in the direct to consumer channel,” Kupferberg wrote.

James Kleimann is the Mortgage Editor at HousingWire. Write to him at jkleimann@housingwire.com

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