Is Rocket a Good Mortgage Stock to Own in the Hot Housing Market?

Real estate and mortgage business operator Rocket Companies, Inc. (RKT) made its stock market debut in August 2020. It is the largest mortgage lender in the United States. Its shares have plunged 12.9% year-to-date and 20.4% over the past month. While RKT has been able to double its home loan volume year-over-year, the company’s management expects its closed-loan volume to be between $82.5 billion to $87.5 billion in the second quarter of 2021. This would represent a significant sequential decline from $103.5 billion.

The stock is currently trading at $17.61, 59% below its 52-week high of $43.

Although the sizzling housing market has thus far been an advantage for RKT, given that the company’s refinancing business is heavily reliant on loan volume and is sensitive to mortgage rates, we think the stock could be a risky bet.

Here is what we think could influence RKT’s performance in the near term:

Booming Housing Market                                                                    

Low mortgage rates and a shortage of  housing inventory continue to fuel housing prices. According to the latest S&P CoreLogic Case-Shiller Index, home prices nationally rose 11.2% year over year in January, recording the largest annual gain in nearly 15 years.

While a recovering economy and rising inflation will likely push  mortgage rates higher, they are still among the lowest in history. Bolstered by the stay-at-home culture and the low mortgage rate, the demand for homes continues to surge. And because the COVID-19 pandemic has caused a shift in demand for housing away from big cities to less crowded spaces, housing prices in suburban locations are rising at a faster rate.

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Unfavorable Analyst Estimates

A consensus EPS estimate for the current year indicates a 29% decline year-over-year. Also, analysts expect the company’s EPS to decline 18.5% in its fiscal year 2022. RKT’s revenue is expected to decline 46% from its  year-ago value to $12.03 billion in the current year. In fact, the Street expects the company’s annual revenues to decline 26.1% year-over-year to $9.81 billion next year.

Mixed Financials and Profitability

RKT’s net revenue increased 236% year-over-year to $4.58 billion in its  first fiscal quarter, ended March 31. Its loan servicing income was  $538.28 million, compared to negative $734.16 million in the first quarter of 2020. However, its total expenses increased 37.5% from its  year-ago value to $1.74 billion. The company’s gain-on-sale margin declined 67 basis points sequentially to 3.7%.

The company’s 100% trailing-12-month gross profit margin is 68.9% higher than the 59.2% industry average. Also, its 66.3% EBIT margin is 166.9% higher than the 24.8% industry average. However, its trailing-12-month levered free cash flow margin is negative 15.8%, and its  1.7% net income margin is 93.9% lower than the 27.5% industry average.

POWR Ratings Reflect Uncertain Prospects

RKT has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. RKT has a D grade for Growth and Stability. The company’s weak growth in financials justifies the Growth grade. Also, instability in its business prospects is in sync with the Stability grade.

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It has a C grade for Quality, which is consistent with the stock’s mixed profitability.

In addition to the grades we’ve highlighted, one can check out additional RKT ratings for Sentiment, Value and Momentum here.

RKT is ranked #51 of 103 stocks in the D-rated Financial Services (Enterprise) industry.

There are several top-rated stocks in the same industry. You can access them here.

Bottom Line

RKT’s mortgage lending business could see decent growth given  favorable housing market conditions. However, management’s expectations of a slowdown in loan volume in the second quarter of 2021 could be concerning for investors. Moreover, the Mortgage Bankers Association expects rates to rise to 3.7% by the end of the year. If  mortgage rates increase, it could slow down the demand for RKT’s refinancing business. Thus, we think investors should wait for a little more stability in its business before investing in the stock.

RKT shares were trading at $17.13 per share on Wednesday morning, down $0.48 (-2.73%). Year-to-date, RKT has declined -15.28%, versus a 9.08% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…

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