Bear of the Day: PHH Corp (PHH) - Bear of the Day

PHH Corp (PHH) delivers outsourcing solutions in private-label mortgage originations and fleet management through its subsidiaries, PHH Mortgage and PHH Arval.

PHH Mortgage provides outsourced solutions to financial institutions, real estate companies, credit unions, corporations and government agencies. PHH Mortgage is one of the top 10 originators of retail residential mortgages in the country. They also provide home financing directly to consumers.

PHH Arval is a fleet management services provider for corporate clients and government agencies throughout the US and Canada. They currently have over 580,000 automobiles and trucks under management in both sales and service fleets. The company has recently announced an agreement to sell this business.

Disappointing First Quarter Results
 
On May 7, the company reported its financial results for Q1 2014. The quarter resulted in a core loss of $0.32 per share, compared to the Zacks Consensus Estimate for earnings of $0.26 per share. The company has missed estimates in three out of last four quarters, with an average negative surprise of 59%.
 
The Fleet business reported a profit of $21 million, which was more than offset by the $60 million loss in the Mortgage production segment and $29 million loss in the Mortgage Servicing segment.
 
Mortgage origination business was hurt due to plunge in refinancing volume, with the interest rate lock commitments (IRLCs) expected to be down 18% from the previous quarter and down 65% from Q1 2013. Mortgage closing volume was down 22% from the previous quarter and 45% from Q1 2013.
 
Downwards Revisions
 
Due to disappointing results and the sale announcement, quarterly and annual estimates have been revised sharply downwards in the past few days by analysts.
 
Zacks Consensus Estimate for the current year now stands at ($0.41) per share versus $1.55 per share, 30 days ago, while the next year's Consensus Estimate is $1.38 per share now, down from $2.28 per share.
 
Sale of Fleet Management Services business
 
On June 2, the company announced an agreement to sell its fleet business to Element Financial Corporation for approximately $1.40 billion in cash. . Upon closing, PHH expects to record an after-tax gain of approximately $250 million to $300 million. This was less than market expectations.
 
Moody's Rating Review
 
On June 3, Moody's put the long-term ratings of the company on review for a possible downgrade. The rating action followed PHH's announcement regarding the sale of Fleet Management Services business.
 
Per Moody's, “the sale weakens the company's franchise strength and results in a more concentrated monoline business solely focused on residential mortgage banking. Further “while the company has indicated that it will use the sale proceeds to invest in its mortgage banking business, de-leverage its balance sheet, and return capital to shareholders. Nonetheless, it is likely that it will take several years before the company can reestablish acceptable levels of profitability.”
 
Better Play?

Investors looking to play the mortgage servicing industry could look at Home Loan Servicing Solution HLSS or Orchid Island Capital ORC—both Zacks Rank # 1 (Strong Buy) stocks. But we may add that the industry in general faces a number of near-term challenges.

The Bottom Line

PHH is currently Zacks Rank # 5 (Strong Sell) stock and the mortgage servicing industry currently has a Zacks Industry rank of 228 out of 265 (bottom 14%). Both indicate strong chances of underperformance in the short term.

The sale of the fleet business which was the major source for stable cash flows for the company leaves it with the loss making mortgage business, which does not show any signs of turning around soon.

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