M&A And Digital Automation Will Expand Servicing Capabilities

Key Takeaways

• Strategic expansions in origination and servicing aim to enhance future revenue and net margins through increased scale and efficient resource allocation.
  
• Investments in technology and new market segments are expected to lower costs and drive revenue growth, boosting profitability and widening market reach.
  
• Economic uncertainties, legal challenges, and reliance on subservicing market could negatively impact Onity Group's revenue, profitability, and investor perceptions.

Catalysts

A financial services company, originates and services forward and reserve mortgage loans in the United States, the United States Virgin Islands, India, and the Philippines.

• Onity Group's growth in origination volume and total servicing UPB is an operational priority, positioning them to increase future revenue through enhanced scale and market presence.
  
• The company is expected to see an increase in their servicing book value and adjusted ROE performance, likely enhancing net margins through efficient resource allocation and sound strategic execution.
  
• M&A activity, like the Rocket acquisition of Mr. Cooper, may drive Onity to expand its servicing scale and capabilities, potentially improving future earnings through increased client acquisition and enhanced servicing operations.
  
• Onity's investments in technology and automation, including digital interfaces handling customer inquiries, may reduce costs and improve operating efficiency, positively impacting net margins and profitability.
  
• New product launches and expansion into higher-margin market segments are expected to widen Onity's addressable market, contributing to revenue growth and higher earnings potential in the consumer direct channel.

Onity Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Onity Group's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $101.2 million (and earnings per share of $12.81) by about May 2028, up from $33.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.8x on those 2028 earnings, down from 8.5x today. This future PE is lower than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to grow by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Onity Group Future Earnings Per Share Growth

Risks

• The unpredictable market conditions and interest rate volatility could lead to increased hedge costs and impact origination margin volatility, thus affecting revenue and net margins.
  
• A potential recession increasing the probability since the beginning of the year could drive down mortgage origination volumes and increase delinquencies over time, impacting earnings and net income.
  
• The company's reliance on the subservicing market, in light of recent M&A activity and changes in the competitive landscape, poses a risk of losing clients or being unable to secure new business, which could negatively impact revenue.
  
• Legal and regulatory challenges, such as ongoing litigation related to legacy issues or regulatory inquiries (e.g., convenience fees), could lead to unexpected legal expenses, impacting net margins and profitability.
  
• The valuation allowance on deferred tax assets, while potentially beneficial financially, introduces complexities and uncertainties that could affect investor perceptions and financial metrics like book value, potentially impacting the share price.

Valuation

• The analysts have a consensus price target of $43.75 for Onity 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 $50.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $101.2 million, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $35.53, the analyst price target of $43.75 is 18.8% 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.