UPDATE: Compass Point Reiterates Buy Rating, Raises PT on PennyMac Financial Services as FHA Premium is Cut to Drive Higher Volume

In a report published Thursday, Compass Point analyst Kevin Barker reiterated a Buy rating on
PennyMac Financial Services
PFSI
, and raised the price target from $18.00 to $21.00. In the report, Compass Point noted, “We reiterate our Buy rating and raise our price target to $21 from $18 following the announcement that the FHA will lower insurance premiums by 50 bps. The decline in mortgage insurance premiums (MIPs) for FHA loans will incrementally increase FHA purchase originations and significantly increase the refinance volume for loans originated in 2H13 through 1H14. Out of the two publicly traded PennyMac companies, PFSI stands to be biggest beneficiary given that it primarily originates FHA loans. Between 2H13 and 1H14, PFSI originated over $14B in FHA loans, the vast majority of which are in their servicing portfolio. Refinancing such loans could potentially save over 1.0% of their mortgage rate after incorporating a 50 bps drop in insurance premiums. If PFSI were to refinance just 10% of these loans through their retail channel, PFSI's high-margin retail originations would double from the run-rate they were at in 3Q14. Due to this development, we are increasing our FY15E EPS to $2.34 from $2.15 and FY16E EPS to $2.80 from $2.58. PFSI remains one of the best positioned non-bank originators to profitably grow its business, especially if we see a pickup in origination volume from lower rates and increasing credit availability.” PennyMac Financial Services closed on Wednesday at $17.30.
Posted In: Compass PointKevin BarkerAnalyst ColorPrice TargetAnalyst Ratings