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Bear of the Day: PHH Corp (PHH)

Neena Mishra

Declining estimates for this mortgage lender sent the stock back to a Zacks Rank # 5 (Strong Sell) in November last year.
About the Company

PHH Corp (PHH) delivers outsourcing solutions in private-label mortgage originations and fleet management through its subsidiaries, PHH Mortgage and PHH Arval.

PHH Mortgage provides outsourced solutions to financial institutions, real estate companies, credit unions, corporations and government agencies. PHH Mortgage is one of the top 10 originators of retail residential mortgages in the country. They also provide home financing
directly to consumers.

PHH Arval is a fleet management services provider for corporate clients and government agencies throughout the US and Canada. They currently have over 580,000 automobiles and trucks under management in both sales and service fleets.

Disappointing Results and Guidance
PHH reported it third quarter results on November 6, 2013. The quarter resulted in a net loss of $52 million or $0.90 per basic share. Net operating earnings after excluding one-time items were ($0.12) per share per, substantially short of the consensus estimate of $0.24 per share.
While the fleet business delivered a 14% increase in segment profit over the prior year; the mortgage business generated a loss due to lower total loan margins, lower lock volume, and severance costs.  Mortgage production earnings decline was driven by higher interest rates, declines in refinancings and a continued mix shift to fee for service originations.
Tangible book value per share declined to $27.33 at September 30, 2013, down 3% from $28.14 at June 30, 2013.
Downwards Revisions
Due to disappointing results, quarterly and annual estimates have been revised sharply downwards in the past few weeks by analysts.
Zacks consensus estimate for the current quarter now stands at $0.07 per share versus $0.17 per share, 60 days ago, while the full-year consensus estimate is $1.41 per share now, down from $1.58 per share. Further, the estimate for FY 2015 has also gone down.
The company has missed estimates in all last four quarters, with an average negative surprise of 87.2%. Downward estimates revisions sent PHH to a Zacks Rank # 5 (Strong Sell) on November 12, 2013. It was earlier featured as the Bear of the Day in November. The stock continues to be Zacks Rank # 5 as estimates are still moving downwards. In view of new developments involving Federal investigation, we decided to revisit the stock.
Federal Investigation
Last month the Consumer Financial Protection Bureau accused PHH of collecting illegal kickbacks from certain mortgage insurers and in turn increased costs for home mortgage customers. According to the bureau, company referred borrowers to companies with whom it had business relationships. The CFPB alleges that PHH over 15 years collected up to 40% of premiums paid by consumers to mortgage insurers. PHH and its subsidiaries are specifically charged of kickbacks, overcharging loans and creating higher priced insurance.
PHH denied the allegations.
Better Play?

Investors may like to avoid the mortgage servicing industry for the time being in view of the near-term challenges lying ahead.

The Bottom Line

PHH is currently Zacks Rank # 5 (Strong Sell) stock and it also has a longer-term recommendation of “Underperform”. Also the montage industry currently has a Zacks Industry rank of 235 out of 265.

Further, in view of the allegations of malpractices by a Federal agency, investors should avoid this stock for the time being.
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