Following the announcement Tuesday to acquire Reverse Mortgage Solutions, the share price of Walter Investment Management Corp. (NYSE: WAC) jumped 15% during intraday trading.
The share price rose from just under $28 per share on August 31 to opening above $32 per share on Wednesday, surpassing its 1-year high. Such a jump is to be expected based on the growth potential presented by the acquisition says analyst Henry Coffey of Sterne Agee.
“Given the earnings accretion from the transaction, I am not surprised at all to see this move,” Sterne Agee’s Coffey told RMD.
FBR Capital researchers lifted their target share price of the company from $32 to $36 in a Wednesday report. FBR lists an outperform rating for the stock.
Walter Investment stated in announcing the transaction that WAC’s acquisition of RMS would have been accretive to 2012 core earnings per share by approximately 25% had the acquisition been completed at the beginning of this year.
It presents strong opportunity across business channels, Coffey said.
“There are multiple channels for originating mortgages,” he said, noting Walter Investment’s subsidiary Green Tree, a forward mortgage originator. “The closer to the source, the more profitable. RMS clearly has the capability combined with Walter Investment to do that.”
While analysts on a conference call Tuesday questioned whether past lender exits from the reverse mortgage business should be seen as a deterrent to market entry, the opportunity trumps any headline risk, the company executives said.
“We talked with all three. For two, the story was similar [having to do with] the current state of the mortgage market. Potentially in their view [reverse mortgages] had some reputational risk around the nature of the product and the age of the mortgage holder. They saw it as non-core going forward. MetLife had a successful business and had been public about its desire to exit all mortgage businesses.”
Others asked about the recent reverse mortgage report published by the Consumer Financial Protection Bureau and its findings on reverse mortgage loans and lenders.
“It was a bit critical of the industry,” Walter Investment execs said. “But shouldn’t dampen anyone’s enthusiasm for the product.”
Written by Elizabeth Ecker