While the market remains focused on chasing every business run by Elon Musk, it continues to ignore huge cash flow generators such as Ocwen Financial Corp (NYSE:OCN). The company grew revenue by 147% during the first quarter of 2013 yet all indications are that the pipeline is loaded with further growth.
Ocwen Financial Corp (NYSE:OCN) engages in the servicing and origination of mortgage loans. The company claims to be able to use proprietary technology to provide solutions to help homeowners and client’s loans become worth more.
Earnings growth opportunities
Even with the huge revenue growth and potential pipeline of new deals, the stock has mostly stalled since October last year. Investors generally fear that the growth opportunities have peaked and that earnings will stall as the real estate market improves and the general economy grows. After all, who needs an expert in delinquent mortgage servicing if the loans don’t exist?
During the earnings call, Ocwen Financial Corp (NYSE:OCN) spent a considerable amount of time discussing the long term potential. The company will spend this year and next year integrating the Homeward and ResCap deals that brought in $469 billion worth of unpaid principal balance (UPB). It also sees a pipeline of $375 billion from other bank divestitures along with the potential for expansion into prime and reverse mortgages.
Ocwen Financial Corp (NYSE:OCN) forecasts that the cumulative adjusted operating cash flow over 10 years could hit nearly $12 billion if the company can re-invest excess cash at a 15% return. See the slide from the earning call below:
Competitor spin-off?
Nationstar Mortgage Holdings Inc (NYSE:NSM) remains a force in the sector with the servicing portfolio expanding to an UPB of $435 billion. On the first quarter earnings report, the company forecast earnings of $4.05 – $4.75 in 2013 and $6.45 – $7.50 in 2014. Based on those numbers, the stock only trades at 6 times those forward estimates.
The stock could also benefit from investor hopes that Nationstar Mortgage Holdings Inc (NYSE:NSM) will spin off the Solutionstar unit to the same success as the Altisource Portfolio Solutions S.A.(NASDAQ:ASPS) spin-offs from Ocwen Financial Corp (NYSE:OCN). As an example, Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) has grown by 500% since it was spun-off in August 2009.
Altisource Portfolio Solutions S.A.(NASDAQ:ASPS) is benefiting from the same sector moves with earnings expected to surge from $4.43 in 2012 to over $8.50 by 2014. The stock unlike the major mortgage servicers trades at nearly double the multiple with the stock trading at over 11 times earnings.
While the Nationstar Mortgage Holdings Inc (NYSE:NSM) stock might see a bump from a spin-off of the Solutionstar unit, investors shouldn’t expect a similar jump as the move from Altisource Portfolio Solutions S.A.(NASDAQ:ASPS) back during the financial depression.
Bottom line
While the substantial revenue growth that will occur in 2013 won’t be duplicated at that level in 2014 and beyond, the companies should continue growing earnings into the out years. The stocks trade at significant discounts to the cash flows being generated. The group has traded relatively flat the last six months providing an opportunity for investors to buy these stocks at 6-7 times 2014 earnings and in the case of Ocwen at only 7 times last year’s cash flow. Remember this is while the stock market as a whole trades at 2-3 times those multiples.
The article Amazing Upside Left at Ocwen Financial originally appeared on Fool.com.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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