Key Analyst Sees Over 20% Upside in Ocwen After Preliminary Earnings

The company had $0.27 in earnings per share (EPS) on $510.4 million in revenue, compared to Thomson Reuters consensus estimates of $0.13 in EPS on revenue of $488 million. In the first quarter of the previous year, it posted EPS of $0.43 on $551.26 million in revenue.

As these are only the preliminary results, the company announced that it now currently intends to file its 2014 Form 10-K and first quarter 2015 Form 10-Q no later than May 29.

Ron Faris, president and CEO of Ocwen, commented on the preliminary earnings:

I am proud of what we have accomplished as far as managing the business through this difficult transition period. We made great progress on our asset sale strategy, have returned to profitability and continue to generate substantial operating cash flow. However, I am not satisfied with only making $34 million in the quarter. We intend to do better.

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Sterne Agee was not looking for a wholly smooth series of events. It is clear that Ocwen’s 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. As a result, the analyst raised its estimates, increasing the price target to $12 from $10, implying an upside of 22% from current prices, and raising the rating to Buy from Neutral.

Excluding the impact of fair value marks and gains from loan and servicing sales, operating EPS of $0.18 were above Sterne Agee’s estimate of a loss of $0.08 per share.

According to Sterne Agee:

We are expecting servicing revenue to remain above 38 bps of servicing balances and servicing cost to move from what we estimate to be 30 bps of servicing to 20 bps over the next 2-4 quarters. 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. Given this, we are raising our 2015 EPS estimate from $0.12 to $0.66 and initiating a 2016 EPS estimate of $0.95.

At the end of the quarter, tangible book value was $8.30 per share. Considering the gains and losses from the sale of servicing, the fair value of the remaining agency servicing that is held at cost, expected earnings for the rest of the year, and other items, Sterne Agee’s analytics point to a year-end book value of $10.30 per share.

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Friday morning, shares of Ocwen were up 16% to $9.86, in a 52-week trading range of $5.66 to $38.80. The stock has a consensus analyst price target of $10.33.