The U.S. housing recovery continues to be uneven, as reported in this Reuters story. The July 30 GDP data was stronger than expected, and mortgage rates shot higher, hovering around 4.25%. In May 2013, the 30-year fixed mortgage rate was 3.52% and that was good news for mortgage and thrift companies such as Nationstar Mortgage Holdings (NSM.N). Homeowners rushed to refinance or snapped up new homes. As interest rates have risen in the past year, that flurry of activity has gone down. What are Nationstar’s prospects now?
In addition to the interest rate environment, Nationstar also is contending with a recent investigation by New York State’s banking regulator for consumer complaints. It looks like the company may have grown too quickly. Nationstar currently has a negative StarMine Predicted Surprise of 7% which leads us to believe it is likely to miss the earnings consensus when it reports second quarter results in August.
Source:StarMine
High debt level
Nationstar has over $10 billion in total debt, and scores poorly on the StarMine credit models, ranking in the bottom decile of all companies in the region, which is an indicator that the company may not be on strong financial footing. The forward 12 month EBIT to interest expense ratio is just 1.09, which means Nationstar is barely earning enough to pay its interest expense. As you can see in the chart above, in the past 12 months, Nationstar earned operating income of $696 million and paid out $603 million in interest expenses. The poor interest coverage is a reason why Nationstar scores the lowest possible score of 1 on the interest coverage component of the StarMine SmartRatios Credit Risk model.
Source: Datastream Pro/StarMine
Estimates are sliding
Analysts have lowered earnings estimates for Nationstar by just 1.5% for the current quarter over the last 90 days. However, at 85 cents per share, the SmartEstimate is still 6 cents per share below the consensus. There is even a Bold Estimate of 73 cents per share from a highly rated analyst with a strong track history.
Nationstar purchased Real Estate Digital (RED) in order to expand the footprint of its Solutionstar business. The company already has almost $2.7 billion in goodwill, which represents the amount paid on top of book value for the acquisitions, but it remains to be seen if that goodwill can be monetized in the coming years and whether “synergies” emerge.
Source:Eikon/StarMine
Low value?
Nationstar scores poorly on almost every StarMine model, except the valuation models. However, the company may appear cheap for good reason. The StarMine Credit Risk Text Mining model combs through transcripts, research reports and Reuters news feeds to systematically identify key words that may identify signs of weakness. For example, the story about New York State’s inquiry into complaints against Nationstar earned a score of 1, a bearish indicator. In that report the N.Y. Department of Finance alleged that “the growth of Nationstar and other non-bank mortgage servicers may create capacity issues that put homeowners at risk.”
Ninety days ago there were three buy recommendations and no sell recommendations for Nationstar. There are now two buy recommendations and one strong sell recommendation. It looks like analysts are continuing to turn bearish on Nationstar’s earnings prospects and the Analyst Revisions Model reflects that with a score of 2. The company missed earnings last quarter and the outlook doesn’t look much better this quarter.
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