PHH Corp. (PHH) Has More Upside as Servicing Costs Ebb, Competition Thins - Barron's

November 26, 2012 10:05 AM EST
Shares of PHH Corp. (NYSE: PHH) are higher on the session Monday following a positive mention in Barron's over the weekend.

The mortgage-banking and car-leasing company, which is trading near 52-week highs, has scale and resources to offer superior service compared with its peers.

Though the car-leasing unit is 600,000 vehicles strong and PHH works with names like Comcast (Nasdaq: CMCSA) and Verizon (NYSE: VZ), is the mortgage-banking business which is grabbing investor interest.

Last year, PHH cancelled a debt offering ahead of a corporate debt downgrade to junk. The news caused shares to fall to $10 and its then-CEO to resign. Barron's thinks that PHH has more room to run as shares get back to the low-$20 range.

Leading the turnaround is CEO Glen Messina. Margins have been boosted in the unit and liquidity concerns have all but been lifted.

Core income has shown strong growth, with EPS up to $2.15 per share through the end of September, versus a loss of $24 million in the same period last year. The core number strips out revisions for mortgage-servicing rights. With mortgage rates near record lows, more refinancings are happening, which leads to broader prepayments. The adjustments are needed to shorten the life of mortgages in the $185 portfolio.

Typically, PHH holds paper for about 30 days or less before selling to government-sponsored entities like Fannie Mae and Freddie Max. That leads to lower-than-average delinquency rates, which reduces the risk of putbacks and indemnification stemming from underwriting defects.

One investor cited by Barron's says PHH might find a private equity firm offering $30 per share for a buyout of the firm. He notes how Blackstone (NYSE: BX) showed interest in 2008, but the recent "wash out" of the mortgage industry leading to fewer competitors has made the firm more attractive.

Should PE firms come knocking, investors might find themselves with 41 percent or more of upside. PHH is up about 1.6 percent early Monday.

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