Jefferies Downgrades Rocket Companies (RKT) to 'Hold' and Lowers PTs for loanDepot (LDI) and UWM (UWMC) as Survey Shows 'Competition & Margins are Worse than Expected'
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Shares of Rocket Companies (NYSE: RKT) are down 1.6% in pre-open Monday after Jefferies analyst Ryan Carr downgraded the stock to “Hold” from “Buy.”
The latest survey of mortgage loan brokers indicates that wholesale pricing remains low, pricing remains the most important factor. Moreover, the survey shows that brokers have become more aggressive in pricing loans to consumers and they see the most competition from the retail channel.
“While some mgmt teams have indicated the pricing war lasting only 1-2 qtrs, others (notably RKT), have announced their intentions to make recent price cuts permanent. Pricing incentives, which began in 1Q, were supposed to be temporary. These have since been extended beyond the end of 2Q, while RKT announced the permanent integration of its credit into base pricing. On the heels of these announcements, additional channel checks suggest other competitors may take advantage of dislocation and attempt to take share,” Carr said in a report sent to clients.
Survey results show that brokers are now “hyper-competitive on pricing to consumers” as a result of lower pricing they get from wholesale partners
“This leads to more "spread" for the broker, and more ability to price a loan lower vs. a competing institution's offer. Further, brokers expect to originate more in 2H21 vs. 1H21 (despite industry expectations for lower volumes), which can only come from retail, in our view. We believe retail margins will also be impacted by competition in the wholesale channel, & adjust our thesis on RKT as a result,” Carr further explains.
As a result, the RKT stock is downgraded and its price target is slashed to $18.00 per share from $26.00 per share.
“We look to 2Q conference call for an update on competitive pressures, which we anticipate will reveal the depth of the price war and potentially serve as a negative catalyst for the space. These dynamics have caused margins to contract much faster vs. historically in cycles, and frankly, much faster than we'd initially anticipated, while we highlight potential for multiple contraction if pressures persist LT. We reduce our go-forward GOS & EPS estimates, expecting trough margins in wholesale to persist this year & ongoing decline in retail.”
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