Acquiring Flagstar And Advancing AI Will Strengthen Future Market Presence

Key Takeaways

• Strategic acquisitions and customer onboarding are projected to boost revenue growth, market position, and earnings expansion.
  
• Leveraging technology and AI promises enhanced efficiency, customer satisfaction, and profitability, positively impacting margins.
  
• Persistent high interest rates and increased competition may squeeze margins and impact net earnings amid integration and operational risks in mortgage servicing.

Catalysts

Operates as a non-bank servicer of residential mortgage loans in the United States.

• The acquisition of Flagstar's mortgage banking operations and the onboarding of 1.1 million new customers are expected to enhance Mr. Cooper's revenue growth and market positioning, contributing to future earnings expansion.
  
• A strong position in the correspondent channel and top 5 market share in originations indicate potential for increased revenue and market penetration, thereby improving overall earnings.
  
• The company's focus on leveraging technology and AI, such as AgentiQ, promises greater operational efficiency, customer satisfaction, and lower servicing costs, which may positively impact net margins and profitability.
  
• Expansion of service-related fee incomes, such as subservicing and master servicing, expected to sustain double-digit growth, can provide a stable, high-margin revenue stream that improves earnings quality and diversification.
  
• Improved ROTCE guidance of 16% to 20% for 2025 and 2026, driven by operational leverage, disciplined acquisitions, and cost leadership, reflects expectations for enhancing shareholder value and net income.

Mr. Cooper Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mr. Cooper Group's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.1% today to 36.5% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $18.0) by about March 2028, up from $669.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, down from 9.8x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.4x.
• Analysts expect the number of shares outstanding to decline by 1.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.17%, as per the Simply Wall St company report.

Mr. Cooper Group Future Earnings Per Share Growth

Risks

• Potential macroeconomic shifts, such as persistent high interest rates, could dampen origination growth or refinancing activity, impacting revenue and earnings.
  
• Competition in the Master Servicing market is high, potentially squeezing margins and affecting net earnings if the company cannot maintain or grow its market position.
  
• The rapid pace of MSR acquisitions could expose the company to integration risks, potentially straining operational resources and impacting net margins.
  
• The company's focus on technological investments presents execution risk, where failure to deliver expected efficiencies may lead to higher operating costs, decreasing net margins.
  
• Economic or regulatory changes impacting real estate markets or mortgage lending could affect the company's revenues and net profits due to its heavy reliance on mortgage servicing and origination.

Valuation

• The analysts have a consensus price target of $126.625 for Mr. Cooper Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $146.0, and the most bearish reporting a price target of just $110.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.1 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 11.2%.
• Given the current share price of $103.1, the analyst price target of $126.62 is 18.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.