For some niche players in the financial markets, the economic debacle and mortgage meltdown have been absolute boons. One big winner is little-known Lender Processing Services (LPS), whose otherwise mundane business of providing mortgage processing and default management services turned overnight into a golden goose. (LPS is not in the lending business.)
The stock of LPS has more than doubled in a year, to 41.94 a share on Nov. 24 from a 52-week low of 17.70 on Nov. 24, 2008. And the stock isn't done climbing as LPS continues to ratchet up revenues and earnings from all the mortgage and foreclosure problems that have hounded homeowners, banks, and mortgage lenders.
"LPS continues to demonstrate impressive revenue growth of 31% and the ability to deliver results that exceed expectations," says Nikolai Fisken, director of research at investment firm Stephens, who rates the stock overweight. (Stephens has done banking for LPS.)
Foreclosures Spur Demand
LPS offers an array of loan-processing services to its clients, which include mortgage lenders and banks. Lately, demand for its services on handling problem loans in foreclosure has grown to unprecedented proportions, notes Stephens analyst Tyler Bozynski. He says LPS manages about 50% of its clients' loans that are going through the foreclosure process. These are on top of other services LPS renders, including property inspection, preservation, and settlement services.
Because of the solid third-quarter results LPS posted on Oct. 23, 2009, Fisken raised his 12-month target for the stock from 42 to 50 a share.
"LPS remains our best idea as the most recent quarterly results, combined with the updated and improved guidance and outlook for 2099 and 2010, show the company is delivering on our expectations for continued product penetration and market share gains," says Fisken,
He raised his earnings estimate for 2009 to $3.07 a share from $2.96, and his 2010 forecast to $3.40 from $3.33.
Greg Smith, an analyst at investment bank Duncan-Williams, says he continues to be bullish on LPS as it is clear the company is gaining market share and executing well. "The sales pipeline remains strong, and various industry trends are likely to support the company's growth over the coming years."
He argues that LPS is "unique" in that it is a combination of a growth, value, and defensive stock. Its third-quarter results showed revenue growth of 31% and organic (i.e., from existing businesses) earnings-per-share growth of 39%.
Also, the way the company is valued by market players is changing, according to Smith. Shares of LPS, he notes, are moving from a price-to-earnings multiple typical of financial-sector companies toward the higher p-e usually realized by companies with recurring, transaction-processing businesses. Smith assumes the stock will get more favored treatment by Wall Street as a result.
That makes sense, he argues, because LPS has a leading market position in mortgage processing that generates strong free cash flow with a balanced portfolio of cyclical as well as countercyclical products and services. The company is not yet getting credit for its diversified business mix, which has delivered growth through various market conditions, says Smith. He rates the stock a buy, with a 12-month target of 48 a share.
Silver Lining for Investors
Also high on LPS is Glenn Greene, analyst at Oppenheimer (OPY), who rates the stock outperform. He is encouraged by the continued strong pace of its broad-based quarterly growth. LPS is benefiting from the rising pool of "seriously delinquent" loans and the continuing buildup of foreclosures. He expects LPS's default services to continue growing, to about 20% next year.
"We expect the underlying trends at LPS to remain very strong for the foreseeable future," says Greene. Based on current earnings estimate, he says, LPS's valuation "remains very attractive."
For investors, LPS provides a kind of silver lining in these mortgage-distressed economic times. No wonder Wall Street is bullish on LPS, with seven of the nine analysts recommending buying the stock and only two tagging it a hold. Not one recommends a sell.
Among the large institutional investors that have placed huge bets on LPS, according to Bloomberg, are Capital World Investments, which own a 22% stake as of Sept. 30, 2009; Barclays Global Investor, with 6.13%; and Fidelity Management, with 5.06%.