A company in expansion
One of the companies that could profit from the last economic crisis is Ocwen Financial Corp (NYSE:OCN). By buying underperforming mortgage rights to banks, the company has amassed substantial earnings on the back of a recuperating real estate market, a growing asset base and lower legally required capital levels than the banks. The firm’s cash flow generation capability is also impressive. Last quarter, the company generated over $400 million in cash flow, on a market cap of $5.76 billion.
Also remarkable is Ocwen Financial Corp (NYSE:OCN)’s continuous expansion. Over the past few years several firm and mortgage servicing right (MSR) acquisitions have taken place. This should continue as the real estate market has not yet fully recovered, thus offering the firm plenty of opportunities to buy distressed servicing portfolios at convenient prices. Some of the latest acquisitions include Homeward and ResCap, which inflated the unpaid principal balances portfolio by 270%, to approximately $470 billion.
Last quarter’s results also portray an encouraging outlook. Income from operations grew by 108%, year over year, to $163.1 million; revenue rose by 147% to a record $406.7 million; and earnings were over double last year’s equivalent quarter, reaching $0.31 per share.
The servicing sector is currently the biggest source of revenue, and it will need loans to service in the upcoming years. As banks are improving, the company is also preparing for the future; the acquisitions of Homeward and ResCap will serve this purpose, providing Ocwen Financial Corp (NYSE:OCN) with its own credit origination. Another way in which the firm is further developing the servicing segment is by expanding its capabilities through reverse mortgages and home equity lines of credit, which should drive growth in the upcoming years.
Trading substantially cheap in relation to its consensus earnings (8.79 times P/E), its cash generation and returns, while offering compelling long term growth prospects –consensus estimate expects a 25% growth per year over the next five, versus the industry mean of 7.5%-, I’d say that Ocwen Financial Corp (NYSE:OCN) is a buy.
A company with solid market share
Washington Federal Inc. (NASDAQ:WFSL) is a company that has successfully compelled individual investors to put their money down, mainly in loans of various types, but also in U.S. government and agency obligations, amongst others. This simple business model that takes deposits and issues loans is poised to do well in a recovering economy and has, in fact, delivered consistently increasing profits over the last 9 quarters. Furthermore, its expense base is relatively small compared to its peers, and this has helped drive its bottom-line.
Although loans and deposits have been down in general lately, this has not been the case for Washington Federal Inc. (NASDAQ:WFSL). Contrary to its peers, the firm has been augmenting the amount of loans and deposits processed. Actually, net loans accounted for almost $7.5 billion last quarter, which stands for 57% of the company´s total assets. This trend is expected to continue as interest rates stabilize and the economy recoups. Moreover, it has been increasing market share, workforce and physical presence through several acquisitions, including South Valley, Charter Bank and Western National Bank, which have certainly helped its financials. Further acquisitions are likely given Washington Federal Inc. (NASDAQ:WFSL)’s strong capital and liquidity position, and should drive growth in the upcoming years.
Strong financials do not only allow acquisitions, but also share repurchases and dividend payouts, and this is the way it has panned out. The firm has been consistently buying back shares and currently yields 2.08% in the form of dividends. Trading at only 13 times its earnings, versus the 23.6 times P/E industry mean, while offering above average profitability ratios. I’d say that Washington Federal Inc. (NASDAQ:WFSL) is a buy (or at least deserves your attention in the months to come).
A company to invest in
Similar to the companies above, Home Loan Servicing Solutions Ltd (NASDAQ:HLSS), or HLSS, focuses on acquiring mortgage servicing assets. With the stock priced below the investors.com potential buy point of $24, trading at 14.3 times its earnings, at less than 1/10th of the industry average, I’d strongly recommend buying into this company. Operating margin of 87% and net margin of 86.9% comfortably surpass the respective 63.2% and 14% industry means and provide extra reasons to invest in this firm. Numerous funds, including AlianzGI and Neuberger Berman Genesis, have already noticed the potential of the company and have been buying stocks at large. Further evidence is provided by insiders also purchasing shares this year. Even more attractive is Home Loan Servicing Solutions Ltd (NASDAQ:HLSS)’ dividend yield which, at 7.07%, beats most of its peers.
Currently, the firm is focused on increasing its asset base by acquiring more mortgage servicing assets. Last quarter, it completed its third flow purchase from Ocwen Financial Corp (NYSE:OCN) since our inception, two years ago, adding $15.9 billion of UPB to its servicing portfolio, which now amounts to $92.5 billion. As Ocwen has benefited from these sales, Home Loan Servicing Solutions Ltd (NASDAQ:HLSS) expects to continue to purchase such assets and expand its servicing portfolio. Furthermore, the company has focused extra efforts in receiving the necessary permissions to become named servicers for the securitizations where it already own Rights to MSRs and the associated servicing advances. If consent was attained, revenue could largely sore.
Finally, last quarter’s financial results cannot be overlooked. Revenue grew by 1,296% to $45 million, mainly on the back of interest income, and earnings rose 42%, to $0.44 per diluted share, above the analyst consensus estimate. This has led to an expected revenue growth of 278% and earnings increase by 18% for 2013. With a history beating consensus estimates, it would not be a surprise if this were the case for the upcoming quarters. I’d say buy and hold, the outlook is looking good.
Bottom line
The above described financial companies offer compelling investment opportunities, especially for long-term stockholders. Particularly, Ocwen Financial Corp (NYSE:OCN)’s prospects looks very promising. Just like Home Loan Servicing Solutions Ltd (NASDAQ:HLSS), I believe that this firm is poised to grow and, therefore, comprises a buy and hold case.
The article 3 Stocks With Steady Growth Prospects originally appeared on Fool.com and is written by Victor Selva.
Victor Selva has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Victor 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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