Why PHH Shares May Finally Be a Bargain at Deep Discount to Book Value

Keefe Bruyette & Woods raised its equity rating to Outperform from Market Perform on Monday. What stands out in this call is that KBW set a price target of $21.00, after shares closed at $15.60 on Friday.

What investors need to keep in mind here is that PHH was trading at $24.00 just last Wednesday. Then the mortgage company’s shares lost about one-third of their value after delaying when profitability is expected in its core operations. The company also put off a $250 million share buyback plan as there are regulatory investigations underway against the company.

What KBW is pointing out is that there is now a deep enough discount to book value to make the shares intriguing at current prices — it is valued now at roughly 65% of book value.

KBW did trim its earnings expectations through 2016, despite the upbeat valuation call. That $21.00 price target was also lower than its prior target of $28.00.

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Last week, after the earnings report, FBR Capital Markets downgraded shares of PHH to Market Perform from Outperform. They also slashed their price target down to $20 from 428 in that late-week call.

PHH’s net loss was $62 million, or $1.20 per share. That included a $34 million pretax provision for legal and regulatory reserves and a $30 million pretax loss related to the exchange of the convertible notes due in 2017. The company said that its total closings of $12.1 billion were actually up by 30% from the $9.3 billion in the second quarter of 2014.

The company’s post-earnings quote is very long and was aimed to show what the company has been going through. Glen A. Messina, president and CEO of PHH, said:

One year ago we completed the sale of our Fleet business and presented a strategic plan to revise our capital structure, re-engineer our business and position the company for growth. We have continued to execute on these strategies during the second quarter of 2015 through the substantial conclusion of our private label contract renegotiations and the achievement of nearly 50% of our annualized targeted re-engineering benefits. While we have made good progress on our re-engineering activities, we have more work to do. We have encountered delays in executing our strategies to drive organic growth and our servicing segment continues to operate at a loss. Provided market and interest rate conditions materialize as expected and we successfully complete our strategic initiatives, we expect core earnings before one-time items to improve from the second quarter levels and approach break even for the second half of the year. On the same basis, we expect to return to profitability in 2016…

As we reflect on the many accomplishments over the past year, we are ever mindful of the dynamic regulatory climate and the uncertainty it creates regarding the potential consequences of legacy practices. In light of these regulatory uncertainties, the volatile nature of our industry and our need to increase scale to meet our return objectives, we currently believe it is prudent to conserve our liquidity, and have elected to delay our Board-authorized share repurchase program. We remain committed to executing a capital deployment framework to achieve our long-term return objectives and will continue to evaluate our overall capital structure and liquidity position as we progress.

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PHH shares were last seen up 4.5% at $16.30 on Monday, after almost an hour of trading. Its 52-week range is $13.78 to $27.83. PHH’s trading volume was over 10 million shares on the day that shares fell to $16.28 from $24.09 (Thursday) and the volume on Friday was over 4.7 million shares.