Morgan Stanley Sees Walter Investment Management as Trading Near Run-Off Value

In a report published Tuesday, Morgan Stanley analyst Cheryl M. Pate reiterated an Overweight rating and $42.00 price target on

. In the report, Morgan Stanley noted, “We believe that WAC is currently trading at close to our conservative forward servicing portfolio run-off valuation. We performed a deep dive into potential run-off scenarios in forward servicing, given the recent volatility in the mortgage servicing space. While we do not believe a run-off scenario is likely, given the value embedded in the Greentree servicing platform and other parts of the business, and the likely continuing additions to the servicing portfolio even if large bulk transfers are hold (flow, originations), we think a conservative run-off analysis helps frame the debate on potential downside risk. "In our most conservative (base) case ($25/share), we use a 15% amortization rate on pro forma UPB of $262B, no further UPB additions, our 2014 estimates for servicing fee and non-interest cash expense margins, and a 10.5% discount rate. This scenario is conservative in our view as it doesn't consider cost take-outs that would likely occur in areas such as corporate development, maintaining a 4 STAR ranking, and maintaining excess capacity for deals, as well as expense reduction initiatives and slower run-off as rates move higher (CPRs currently in low double digits).” Walter Investment Management Corp. closed on Monday at $27.97.