UPDATE: Morgan Stanley Initiates Coverage on PHH Corporation on Valuation

In a report published Wednesday, Morgan Stanley analyst Cheryl M. Pate initiated coverage on

with an Equal-Weight rating and $23.00 price target. In the report, Morgan Stanley noted, “We see 9% upside to our $23 price target. Though we believe PHH is well positioned to benefit from an improving economy, valuation keeps us Equal-weight. PHH trades at the highest valuation of our mortgage servicing coverage group, at 9.4x 2014e EPS vs. a 7.9x peer group median. As credit-related costs decline to a more normalized level, we expect PHH to turn the corner on servicing profitability in the next few quarters, from -10bps in 2Q13 to +3bps in 4Q14e. We look for the company to benefit from lower credit-related costs as the economy improves and lower prepayment rates as rates continue to move up. A mortgage servicing rights (MSR) vehicle could provide 65bps additional upside to mortgage ROE for a 5-percentage-point increase to the subservicing mix.” PHH Corporation closed on Tuesday at $21.10.