Walter Investment Management Corp (NYSE:WAC)‘s price-to-earnings ratio is simply astronomical–it’s currently north of 11,000! However, if you think that this company is grossly overvalued, you are wrong. In fact, this company could be a very real value opportunity.
The business
Walter Investment Management Corp (NYSE:WAC) operates in a sector that many investors would like to avoid: mortgage investment. Unlike a high-yield mortgage REIT, this company is a mortgage servicer for high-risk loans. These kind of loans were a contributing factor in sinking banks during the financial disaster of 2008. While banks are steering clear, other companies are specializing in this sector and profiting.
WAC Revenue TTM data by YCharts
Revenue for the most recent quarter was $235.9 million — more than double last year’s $105.4 million. Net income came in at $27.7 million, compared to just $5.1 million a year ago.
With this growth, the company has necessarily taken on considerable debt. Long term debt currently stands at $4.25 billion, and the company also has a cash position of $1.36 billion.
Why the drop?
Shares of Walter Investment Management Corp (NYSE:WAC) are currently down 32% from February highs. The drop is puzzling, since the company issued full year earnings guidance between $650 million-$725 million, handily exceeding analysts’ expectations.
Perhaps investors were worried about the Home Affordable Refinance Program coming to an end. Those worries have been laid to rest now that the HARP program was renewed in April and extended to December 31, 2015. The favorable refinance legislation benefits companies like Walter Investment Management Corp (NYSE:WAC) by allowing people to refinance their mortgages who would otherwise be ineligible. It seems the company has at least two favorable years of growth left.
The value
Walter Investment Management Corp (NYSE:WAC)’s P/E ratio may be astronomical, but its forward P/E of just 5 (!) forced me to take a second look.
| Company | Market Cap | Forward P/E | Debt | Cash | Debt/Cash Ratio |
| Walter Investment | $1.25 billion | 5.37 | $4.25 billion | $1.36 billion | 3.1 |
| Nationstar | $3.33 billion | 5.8 | $5.19 billion | $581 million | 8.9 |
| Tree.com | $193 million | 12.51 | n/a | $102 million | 0 |
Tree.com Inc (NASDAQ:TREE) is coming off of a very solid quarter in which the company realized revenue growth of 17% year-over-year. Continuing with the success, this lender has now upped its revenue guidance for 2013 to 20%-25% year-over-year. Tree.com Inc (NASDAQ:TREE)’s cash position coupled with zero debt also look to position the company for solid growth going forward.
Management did caution investors about thinning margins next quarter due to an advertising campaign. The stock could come under some short-term pressure, in which case it would be a good time to get in.
Mortgage servicer Nationstar Mortgage Holdings Inc (NYSE:NSM) has increased both its 2013 and its 2014 earnings guidance. The company now expects to earn $4.05/share this year and $6.45/share next year. Both of these numbers are on the low end. While the future earnings valuation of Walter Investment Management Corp (NYSE:WAC) and Nationstar are virtually the same, Walter has a much better debt/cash ratio — 3.1 vs. Nationstar Mortgage Holdings Inc (NYSE:NSM)’s 8.9 — which I think puts it in a better financial position.
