UPDATE: Compass Point Upgrades PHH Corporation to Buy, Raises PT on Book Value Set-Up

In a report published Monday, Compass Point analyst Kevin Barker upgraded the rating on

from Neutral to Buy, and raised the price target from $22.00 to $26.00. In the report, Compass Point noted, “We believe PHH is setting up well to grow book value over the long term, especially if mortgage rates remain near or above current levels. In addition, we estimate the company will accrete FY14E EPS by approximately 25% if the company were to use excess cash to prepay the 2014 and 2017 debt maturities. Finally, we believe PHH presents an attractive takeout candidate given the appetite in the market for MSRs and the company's access to the purchase origination market. We believe these tailwinds will overwhelm any potential headwinds the company is likely to face from declining origination volumes, lower gain on sale margins, and additional reps/warrants claims. With the stock now trading at 77% of 2Q13E TBV, we believe the stock presents a very attractive risk-reward. Due to the dramatic increase in mortgage rates, we are adjusting our FY13E "core" EPS from $1.25 to $0.55 and FY14E EPS from $2.30 to $2.10. However, we are increasing our FY13E GAAP EPS from $1.45 to $3.73. Our FY14E GAAP EPS assumes mortgage rates reach 4.5% and stay flat through the year, causing our EPS estimate to equal our operating estimate of $2.10. We are also adjusting our 2Q13E core EPS from $0.21 to $0.16, but increasing our GAAP EPS from ($0.58) to $1.74. Our price target of $26 uses a sum-of-the-parts valuation methodology that assigns a 1.3x TBV multiple to the fleet segment and 1.0x TBV multiple to the origination/servicing segment, while haircutting the valuation by $2.21 to take into account potential reps/warrants and litigation charges.” PHH Corporation closed on Friday at $19.51.