Piper Jaffray Believes the Pullback in OCN is a Buying Opportunity (OCN)

Piper Jaffray is out with a research report this morning, where it reiterates its Overweight rating on shares of Ocwen Financial Corp.

. The PJ analysts said, “We are reiterating our Overweight rating on OCN as we view the risk/reward as compelling given a recent 20% pullback on a "sell on the news" following the HomEq deal announcement. We believe additional accretive servicing rights acquisitions or subservicing deals could be on the horizon. OCN is arguably the leader in the servicing of subprime mortgage loans. Demand for premier servicing of those assets should only increase as the percent of the U.S. population with imperfect credit scores has increased. We are also adjusting our '10 EPS estimate lower to account for the $60m in HomEq acquisition deal costs. Our core '10 earnings expectations are unchanged and we are raising our '11 EPS estimate to $1.45 from $1.40 on strong cash flow and faster debt paydown expectations.” They added, “We continue to believe that OCN is looking at other servicing rights that are in play. OCN will be very tough competition in the bidding for servicing rights given its low cost operating model, well above-average ability to keep borrowers current, and ability to line-up financing. We expect any acquisition to be very accretive even if OCN has to raise equity to swallow a portfolio the size of HomEq, or larger. OCN is nearing completion of its $350m debt raise, which OCN stated would be used to replace the $140m bridge financing for HomEq and as additional acquisition financing.” They also said, “An additional servicing rights acquisition would add upside to our '11 EPS estimate of $1.45 and drive book value higher. For '11, we are currently forecasting servicing pretax income as a % of the UPB to be 33bps in '11. Therefore, our '11 EPS estimate would increase by roughly $0.20/share for every $10 billion in additional servicing added. On top of this, scale and cost synergies would likely drive servicing profitability higher than our 33bps forecast.”