Even The Fed Can’t Stop This Stock

We found something odd.

On paper, Mr. Cooper Group Inc. (COOP) is incredibly cheap.

It trades at 6.48x trailing earnings, 3.71x forward earning…

And 0.90x trailing cash???

Something seemed amiss.

For a stock that didn’t have any searches by financial pros, though a decent amount by retail, something seemed off.

How could this stock exist so cheaply?

As we dug in deeper, part of the answer became clear.

The Fed is raising interest rates in hopes of slowing down an overheated economy and curbing inflation. 

As interest rates rise the cost of borrowing becomes more expensive for homeowners.  If mortgage rates rise too much, it will hurt the housing market. 

It’s no wonder, mortgage-related stocks are down significantly this year. For example, Rocket Companies (RKT) is down 32%, and UWM Holdings Corporation (UWMC) is down 31%.

Plenty of others in the space are down double-digits year-to-date. However, not all stocks in the sector are down. 

Yet, Mr. Cooper Group is up on the year. 

How is that possible? 

Mr. Cooper Group (COOP) Business

Mr. Cooper is one of the largest home loan services in the country. The company operates under two brands: Mr. Cooper and Xome. 

The main namesake division offers an array of services and lending products. 

Xome provides technology and data solutions to homebuyers, home sellers, real estate agents, and mortgage companies. 

COOP has approximately 3.9 million customers and is the largest non-bank servicer in the United States. It is the 4th largest servicer in the United States, a top 15 originator, and a top 10 correspondent lender. 

Within the brands, the firm operates through three segments: Servicing, Origination, and Xome. 

In Q1 2022, the servicing segment of the business recorded pretax income of $558 million, including other mark-to-market of $522 million.

The firm funded 46,933 loans during the first quarter of 2022, totaling approximately $11.6 billion UPB, which was compromised of $7.8 billion in direct-to-consumer and $3.8 billion in correspondent. 

The company has a servicing portfolio of $796 billion in unpaid principal balance. Its originated $11.6 billion in loans. 

Xome is responsible for selling more than 107,000 homes through its auction process. Furthermore, it has done $17.6 billion in total home sales through the Xome auction. 

Financials

COOP continues to increase revenues and improve its gross margin. In 2019 the firm was doing $2.6 billion in revenues, and in 2021 that number shot up to $3.5 billion. And its gross margin went from 33.5% to 57.3%.

The firm reported its total net income of $658 million including MSR mark of $552 million equivalent to ROCE of 71.7% when it reported its Q1 2022 results. 

In 2021, COOP carried a current ratio of 0.90X, which means its short-term obligations are greater than its assets. 

Furthermore, COOP in 2021 had a quick ratio of 0.29X,  which means its highly liquid assets are not enough to cover its short-term liabilities. 

The capital structure for the company is as follows: total debt of $8.64 billion and cash upwards of $651 million, and a market cap of approximately $3.16 billion. 

Valuation

How does this company’s ridiculous P/E ratio stack up to its peers?

COOP’s has a P/E ratio of 2.33x trounces Rocket Companies (RKT) 14.02x and UWM Holdings Corporation (UWMC) 7.28x.

Rocket does carry a price to cash flow ratio of 0.10x. So, it’s safe to say that the price to cash flow ratio is sort of useless.

The reason this metric becomes somewhat meaningless is that the ratio doesn’t include capital expenditures, which is where mortgage servicing rights the company purchases show up.

Still, the company has a price-to-sales ratio of 1.08x, which is below the 

COOP has experienced revenue growth of -15.55% YoY, which is much worse than the sector median of 12.75% as mortgage demand falls.

Yet, its price to book of 0.82x suggests that its assets are worth more than what the stock is trading.

Our Opinion – 9/10

From a valuation perspective, COOP is a very well-run company. Furthermore, it has an excellent gross profit margin and EBITDA Margin. 

And when compared to its larger rivals, COOP has the lowest P/E ratio. 

Of course, the rise in interest rates will have a negative impact on the firm’s originations business. However, the firm believes its services business will pick up the slack.

Based on the price action, we think the company is right. After all, inflation fears have rocked several stocks this year, and beaten down the overall market. 

But COOP is up modestly YTD.

We expect this stock to continue to perform well over the next 12 months. And would-be buyers on any weakness.