Now that the dust is beginning to settle after Ocwen Financial (OCN) reported its first-quarter results, industry observers are beginning to question what’s next for the nonbank.
The company returned to profitability in the first quarter, reversing a trend that saw it lose $546 million in 2014, by posting net income of $34.4 million for the first quarter of 2015.
Despite the company being back in the black, analysts hold diametrically opposed views of Ocwen’s future.
On one side sits Henry Coffey and Jason Weaver of Sterne Agee, who upgraded Ocwen to “buy” from “neutral” on Friday and raised their price target on Ocwen from $10 to $12.
But analysts from Compass Point Research and Trading take the opposite view. In a note published Friday, Compass Point analysts Kevin Barker and Jesus Bueno reiterate their view that Ocwen is a “sell” and lower their price target on Ocwen from $7.00 to $6.50.
The Sterne Agee analysts said that they believe Ocwen’s management has control of the company’s issues and that the company is progressing in its plans for the future.
“While we are not looking for a wholly smooth series of events, it is clear that management is addressing the issues at hand, has the liquidity in place to finance its ongoing operations, and is deep into the process of addressing both operational and profitability issues,” Coffey and Weaver said.
The Compass Point analysts, on the other hand, said that despite Ocwen’s profitable quarter, they believe the company will not be able to realize full market value on its mortgage servicing rights sales.
“We have lowered our price target because we expect the company to realize less value from the sale of MSRs or recovery of deferred servicing fees,” Barker and Bueno said.
“We are now also giving credit for cleanup call rights although it remains to be seen whether Ocwen will realize the full value laid out in the earnings presentation,” the Compass Point analysts continued. “On a positive note, Ocwen was able to report an operating profit this quarter despite all of the noise these past few months. The net operating result was generally in line with our forecast as a higher average portfolio through the quarter generated higher fees than expected, but this was offset by higher expenses.”
The Sterne Agee analysts cite the servicing that Ocwen plans to keep as a positive source of revenue moving forward.
“We are expecting servicing revenue to remain above 38 basis points of servicing balances and servicing cost to move from what we estimate to be 30 basis points of servicing to 20 basis points over the next 2-4 quarters,” the Sterne Agee analysts said.
“Interest expense, the one area where we will need the March 10Q to come up with a more accurate assessment of future cost, should continue to decline,” Coffey and Weaver added. “Given this, we are raising our 2015 earnings-per-share estimate from $0.12 to $0.66 and initiating a 2016 earnings-per-share estimate of $0.95.”
The Compass Points analysts take the opposite view on servicing revenue.
“We currently believe the overall servicing portfolio will drop from $382 billoin in 1Q15 to $253 billion by 1Q16 while servicing fee income increases as a percentage of unpaid principal balance due the mix change in the portfolio to primarily private label,” the Compass Point analysts said.
“At the same time, we expect operating expenses to drop off but the cost to service an average loan at Ocwen will increase as the portfolio will be made up of more delinquent private-label loans and it takes longer to wind down servicing operations than it does to sell the assets,” the Compass Point analysts said. “This will cause margins to squeeze. If we add in litigation and regulatory costs, we do not expect Ocwen to be profitable on GAAP earnings over the next two years.”
While Compass Point may have a negative view of Ocwen’s future, investors jumped all over the stock on Friday, driving the price up nearly 21% for the day. The stock closed Friday at $10.26, up $1.77 for the day.
