Scopia Capital now owns 5.7 million shares of PHH Corporation (NYSE:PHH), which according to a filing with the SEC gives it almost 10% of the total shares outstanding. The fund had owned 5 million shares at the end of September, according to its 13F filing (see more stocks Scopia owned), so overall Scopia has added shares in the last three and a half months. PHH is a credit services company with three business segments: mortgage production, mortgage servicing, and vehicle leasing and fleet management services. Matt Sirovich and Jeremy Mindich co-founded Scopia in 2001 and the fund reported over $2 billion in assets under management in early 2012.
For the most part, revenue from PHH’s various sources was about flat in the third quarter of 2012 compared to the same period in the previous year. The company did have a sizable gain on mortgage loans, a business which is responsible for about 40% of revenue, but most of the increase in net revenue was due to lower net loan servicing losses. Expenses swelled slightly, with the result that overall PHH had a net loss of $42 million. This was a 72% decline in losses from a year earlier, but still represented EPS of negative 74 cents. In the first nine months of 2012, the company lost 42 cents per share.
The stock price has more than doubled in the last year as the market generally expects PHH Corporation to improve its financials. Wall Street analysts are even more optimistic, with their earnings expectations for 2013 implying a current-year P/E multiple of only 8. We’d also note that the P/B ratio is 0.9, so the stock is trading at a small discount to the book value of its equity (though, of course, it is currently doing a poor job of monetizing those assets). There is a considerable amount of bearishness in the market, with the most recent data showing that 27% of shares outstanding are held short. Our database of insider trading filings shows one insider buying the stock last August, though those buys came at a significantly lower price than where PHH currently trades (research insider purchases at PHH).
Allan Fournier’s Pennant Capital Management reported owning 5.1 million shares of PHH Corporation at the end of September, and this position was worth over $100 million at that time (check out Fournier’s stock picks). PHH was also one of the ten largest holdings in Fine Capital Partners’ portfolio; that fund is managed by Debra Fine (find more of Fine’s favorite stocks).
The best peers for the company are ORIX Corporation (NYSE:IX), CIT Group Inc. (NYSE:CIT), and CapitalSource, Inc. (NYSE:CSE); Bank of America Corp (NYSE:BAC) is also a competitor, though that company also has other operations. In terms of earnings multiples, the latter three all trade at 12 to 13 times consensus earnings for 2013; the forward P/E for Orix, based on the fiscal year ending in March 2014, is 7. So in general PHH is priced at a discount relative to comparable companies. Short sellers aren’t nearly as aggressive on these companies as they are at PHH, however, and that company doesn’t look too attractive when we look at price/book ratios.
We don’t think that investors should be buying PHH- at least not yet. It’s possible that the next few quarters will turn out well, in which case it might be worth looking into if the company might hit its earnings targets, but for now we think there is too much risk for too little reward and a number of traders are short the stock. PHH does not look particularly good compared to its peers either.
Disclosure: I do not own any stocks mentioned in this article.
