Tuesday, August 4, 2009

Ocwen Financial (OCN) Beats On Earnings But Issues $250M of Shares - Exiting for Now

I have to say it is very difficult to be bearish on the market when you are seeing some of the things we are seeing. We had 2 companies miss estimates in the past week - Gafisa (GFA) and Quality Systems (QSII) yet their stocks were essentially unaffected (in fact Gafisa went up on the news). Today Ocwen Financial (OCN) beat the analyst estimates as I imagined but announced a massive offering relative to their size ($250M shares for a $1B company). When I saw that news this AM my heart jumped to my throat and I assumed the stock would be down 20%. Instead it's down less than 2% as I type this. I just throw up my hands right now - even when these things are working in our favor. Some things simply make little sense.

Long story short, I like the story here for the next few years as this is essentially a direct way to play the government's transfer of money from taxpayers to specific homeowners, and the companies servicing those loans (who get bonuses for servicing these modifications) - i.e. the major banks and niche players like Ocwen. But with this many new shares the earnings per share will suffer, so prospects just dimmed from a valuation stand point. With this 25% dilution, the only way this would be a positive would be if the money is used for an accreditive acquisition. But with the stock holding up so well, I can only assume I am missing something - I am just unclear what it is.

I am going to sell the position today - there is also a spin off coming imminently and for tracking purposes I don't know if my "mock portfolio" will accurately reflect it, so we'll revisit after the spin off. To be blunt, I have not had time to review this transaction, and its implications so I am going to K.I.S.S. and exit.
  • ....on July 31, 2009, Altisource Portfolio Solutions S.A., the newly formed publicly-traded company comprising the majority of our business operations currently included within the Ocwen Solutions business line, began 'when issued' trading on the NASDAQ Global Select Market under the ticker symbol ASPSV. We expect to complete the separation of Altisource on August 10, 2009 in a tax free pro rata distribution to shareholders of record as of August 4, 2009
We had about a 1.7% stake remaining so we're exiting here at $13.90ish with a nice return from inception. [Jan 9, 2009: Bookkeeping: Starting Ocwen Financial] This was our largest position for large portions of the past 6 months.

First the offering:
  • Ocwen Financial Corporation ("Ocwen") (NYSE:OCN - News) today announced a proposed public offering of common stock. Ocwen intends to offer, subject to market and other conditions, $250 million of its common stock. In connection with this offering, Ocwen intends to grant the underwriters a 30-day option to purchase an additional 15% of the number of shares of its common stock sold in the offering.
  • The net proceeds from the common stock offering will be used for general corporate purposes, including, without limitation, acquisitions and working capital.
Earnings - as we have opined in the past, subprime is almost over, that tranche of borrowers has effectively been moved out of their homes and/or are in the last stages of being saved. Now go forward we will be dealing with the option ARM, alt A, and prime mortgage groups. This is reflected in Ocwen's data. Via Reuters:
  • Ocwen Financial Corp's (OCN) quarterly income from continuing operations beat market expectations, helped by higher revenue from process management fees and a fall in total operating expenses.
  • Income from continuing operations was 24 cents per share for the second quarter, ahead of analysts' average estimate of 22 cents a share. Ocwen posted a net income of $17.8 million, or 26 cents per share, for the quarter, compared with a net loss of $2.7 million, or 4 cents a share, in the year-ago period.
  • However, total revenue for the subprime mortgage servicing company fell 17 percent to $109.1 million from a year ago, while total operating expenses fell 11 percent to $72.7 million.
  • Process management revenue rose 46 percent to $40 million.
  • Ocwen, which reduced its debt and increased cash on hand, also said it expects to participate in the Term Asset-Backed Securities Loan Facility program (TALF) beginning in September and anticipates replacing a $165 million amortizing note with a longer-term TALF note.
Full report here. As you can see ObamaHomeCare is surging
  • Home Affordable Modification Plan ("HAMP") modifications rose from 404 (April) to 836 (May) to 2172 (June)
[May 7, 2009: Ocwen Financial (OCN) with Large Beat]
[Apr 22, 2009: Fight the Power - or at Least Hedge Against It with Ocwen Financial]
[Apr 15, 2009: Treasury Saving $10 Billion for Big Banks to Modify Loans]
[Apr 16, 2009: Bookkeeping - Starting to Ramp Up Purchases in Ocwen Financial]
[Feb 3, 2009: Freddie Mac to Outsource Delinquent Collections - Ocwen Financial Chosen to Start]

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