Compass Point Upgrades PennyMac Financial (PFSI) to Buy

Compass Point upgraded PennyMac Financial (NYSE: PFSI) from Neutral to Buy with a price target of $18.50 (from $15.00).

Analyst Kevin Barker comments, "PFSI reported operating EPS of $0.38, compared to our estimate of $0.29 and the consensus estimate of $0.37, assuming a 42% tax rate on pre-tax income. The beat compared to our estimate was primarily due to better than expected gain on sale margins and higher net servicing fee income. The increase in gain on sale revenue this quarter was counter to the trend we have seen across the mortgage industry in which others saw lower origination and rate lock volumes put pressure on both revenue and margin. However, PFSI was able to recapture a higher rate of refinances, resulting in a higher mix of retail originations, which led to better gain on sale margins. In addition, the company saw significant jumps in market share in the correspondent and retail channels, and it continues to generate servicing portfolio growth through flow and mini-bulk transactions. These positive trends show PennyMac has the ability to profitably grow its business in what is otherwise a very difficult operating environment for originators/servicers. Thus, if or when the tide shifts to favor mortgage originators/servicers, PFSI remains one of the better positioned companies. We are increasing our operating FY14E EPS to $1.63 from $1.41 and FY15E EPS to $2.10 from $1.78. We would note PFSI recently filed a registration statement that would open the door for shareholders who own over 50% of the company to sell their stock in the open market. So, even though we fundamentally view the shares as attractive at current levels, shareholders must acknowledge additional shares could come to the market in the coming months."

For an analyst ratings summary and ratings history on PennyMac Financial click here. For more ratings news on PennyMac Financial click here.

Shares of PennyMac Financial closed at $15.03 yesterday.

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