It’s been six months since Mr Cooper Group (US:COOP) first surfaced on Fintel’s quant screens, flashing a score of 88.32 on the metric that combines Quality + Value + Fund Sentiment. Since then, COOP stock gained more than 20%.

But that was before this week’s strong second-quarter results, which pushed the shares more than 8% higher in Wednesday’s regular session and up a further 5% in after-hours trading. The mortgage company’s improved performance was largely attributed to profitability in both its servicing and originations segments.

And even after those gains, the Fintel dashboard shows COOP shares have a Value score of 85.69, a Quality score of 75.08 and Fund Sentiment at 66.02.

Mr Cooper’s adjusted earnings per share of $1.69 outstripped the Street’s estimate of $1.23, prompting a solid earnings beat. The robust results were driven by an impressive operating income, markups on mortgage servicing rights (MS), and an efficient share buyback strategy. As a result, the tangible book value (TBV) increased 4% quarter-over-quarter and 8% year-over-year.

A chart from Fintel’s earnings page illustrates the consistent earnings outperformance by the company over the last year, with Q2 being the largest since June 2020.

Acquisitions Impact

Looking ahead, the management raised its EBT guidance by 17% for 2023 to over $700 million. The anticipated closing of the acquisition of Home Point Capital (US:HMPT), expected to complete in late 2023 or early 2024, promises to propel further growth.

The company’s impressive operating income and markup on mortgage servicing rights (MSR), along with an attractive valuation given its raised EBT guidance for 2023 and positive earnings surprises, affect the Value factor of Fintel’s quant model.

The model, developed by Fintel, is based on a six-factor Quality/Value score that identifies robust, cash-generating companies with a large moat and growth potential. These are often companies that have fallen out of market favor and are anticipated to recover. Mr Cooper’s strong financial health and its effective capital allocation tactics, such as share buybacks and acquisitions, align with the Quality factor of the model.

The Texas-based company’s servicer portfolio witnessed an uptick to $882 billion, boosted by the recent acquisition of Rushmore Servicing. The pending HMPT deal is expected to swell the portfolio to over $950 billion, edging closer to the ambitious target of $1 trillion.

Immense Opportunities

In the mortgage servicing realm, COOP sees immense opportunities, particularly with the new capital rules potentially inhibiting banks’ inclination to hold mortgage servicing rights. Management hinted at the correspondent market becoming increasingly appealing relative to the bulk market, suggesting a strategic shift in capital allocation.

To ward off potential risk associated with a dramatic MS markdown if rates were to plummet, COOP introduced a new hedge that proved to be efficacious. The company recorded a $139 million MS markup, counterbalanced by a $111 million hedge loss, indicating an 80% offset of the fair value mark.

The hedge strategy, coupled with a series of anticipated one-time gains in 2H23, is poised to drive the TBV higher, thus augmenting the potential for COOP’s valuation.

While the servicing segment churned out higher fees and net interest income, the origination segment witnessed a subtle elevation in margins. Notably, the acquisition of Rushmore Servicing ($543 billion of subservicing unpaid principal balance (UPB) with 31 clients) was a significant highlight of the quarter.

On the digital frontier, Xome, the company’s real estate solutions business, continues to display an upward trajectory. After a lucrative quarter in property sales, Xome reached breakeven in 2020 and anticipates escalating profitability in the latter half of 2023.

Controlling Costs

Amidst these developments, COOP continued to demonstrate an emphasis on cost control, particularly in call center operations. With improved chat technology, COOP managed to reduce both its call center headcount and the average servicing call per loan. Furthermore, the board authorized an additional $200 million for share repurchases, having already repurchased 1.2 million shares for roughly $57 million in the second quarter.

When we dove into Fintel’s analysis of management’s effectiveness, operating cash return on invested capital (OCROIC) looks to be stabilizing around 0.26 after a spike at the end of 2022.

While the shift in business mix in recent quarters has proven to generate positive earnings for shareholders, it is important to understand how cash flows have trended for the company. The chart below from Fintel’s financial metrics and ratios page shows how the decline in cash from operating activities has been more than offset by the reduction in financing costs.

CS Analyst Weighs In

Credit Suisse analyst Douglas Harter bumped up his target price to $64 from $59 per share on his ‘outperform’ call following the update. Harter was pleased to see that the positive earnings beat was driven by better operating results in both the servicing and originations segments of the business.

Fintel’s consensus target price of $57.46 suggests that analysts’ in the market believe the stock is trading largely within fair value. We however believe this consensus average will likely drift higher in the coming weeks as firms update modeling and target prices.

COOP’s positive performance this quarter speaks volumes about the benefits of slow prepayment speeds and substantial operating leverage. The current interest rate environment, coupled with the company’s scaling servicing portfolio and well-regulated expense load, strengthens its earnings visibility.

With an optimistic outlook for the rest of 2023 and into 2024, it appears that COOP’s trajectory is on the rise. As always, investor interest and market trends will remain critical determinants for the lenders future growth.

This article originally appeared on Fintel

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