I have followed Lender Processing Services (LPS) for what seems like a very long time, a near lone voice on Seeking Alpha banging the table for LPS as a recovery play (see for example "Settlement By Lender Processing Services Clears Major Overhang" in early February). So, I find it a bit gratifying that all the work and patience have paid off, capped by news that Fidelity National (FNF) is joining with Thomas H. Lee to buy back LPS. LPS was spun off FNF just five years ago, so I find this M&A deal a bit surprising. I certainly was not anticipating anything like it.
The buyout value for LPS is supposedly around $2.9B. That prices LPS shares around $34. That just happens to be the price of LPS right before "foreclosuregate" broke, an appropriately symbolic completion of the company's rise from foreclosuregate:
LPS had still been trying to recover its pre-foreclosuregate price
One irony of this deal is that I was just in the process of writing up a piece on the last earnings announcement on April 25th. The stock swung wildly that day, ranging from $24.50 to $28 before settling with a 1.4% gain. The stock steadily rose from there. I reviewed the earnings transcript from Seeking Alpha to understand what motivated the rally after such volatility (besides sympathy with the general market rally). In the end, I did not find a specific smoking gun, but the results confirmed that the company's upward momentum out of the foreclosure mess is in full swing.
One eyebrow raising moment was the announcement that John Snow, former secretary of the Treasury and President of JWS Associates had joined the LPS Board of Directors. I considered this a huge win and vote of confidence in the company. Now this move seems even more interesting coming just weeks ahead of this news of a potential acquisition. I also took great interest in an expanded contract with the Federal Reserve Board to provide mortgage data aggregation.
While the earnings news may be less interesting now with an acquisition around the corner, I offer up my notes for reference (a looming stock market sell-off will likely bury the LPS news at the bottom of the headline barrel!) on the housing market. If for some reason the deal rumors are false or an agreement somehow falls through, I still think LPS is a company to own and definitely buy on the dips. I will be selling my shares under the assumption that the news of this deal will take the stock to its maximum value.
The following notes come from the transcript and highlight things that I found of particular interest. They are not a summary of the entire conference call. I have reorganized the notes into themes (in bold):
- Results in line with guidance: 10% revenue growth and adjusted earnings per share of $0.66 in the first quarter.
- Technology, Data and Analytics (TD&A) and Origination Services drove results: first quarter revenue growth was one of the highest ever for LPS.
Products and Services
- Property records database will cover 98% of U.S. residential properties once its expansion is finished midyear.
- Origination Services benefited from strong mortgage refinance volume driven by low interest rates and HARP (the Federal government recently extended The Home Affordable Refinance Program through 2015).
- The appraisal business pressured since HARP refinancings do not require appraisals.
- Approximately 9 million loans are refi-eligible.
- A backlog of approximately 3.2 million seriously delinquent loans.
- The refi market in 2012 was around $1.2 to $1.3 trillion, "depending on the measure." Expect to be down somewhat this year.
- The purchase market will likely grow about 15% to 20% or better in 2013 year-over-year.
- Banks have worked hard to reach HARP-eligible homeowners to refi them into better loans. "… Varying degrees of success" in reaching them. LPS customers "… continue to be pretty confident that they're going to continue to have a lot of HARP activity for the remainder of the year."
Legal and Regulatory Issues
- "… Concluded many of the legacy legal and regulatory matters in the first quarter … moving forward with the final stage of the consent order and any remaining matters."
- Continuing to work through the Consent Order process.
- Have not yet settled with the State of Nevada.
- FDIC suits remain in the legal reserve.
- New federal and state regulations and requirements are still driving foreclosure activity downward and pressuring revenues.
- New regulations, including National Servicing Standards, extend the duration of the foreclosure process. It also encourages alternatives to foreclosure, including modifications and short sales.
- The California Homeowner Bill of Rights went into effect on January 1 drove California default volumes down by about half from the fourth quarter.
Guidance for Q2
- Consolidated revenue $460 to $480 million.
- EPS from continuing operations $0.63 to $0.67.
- TD&A revenue up slightly.
- Transaction Services revenue about flat with Origination Services down "modestly from the first quarter driven by sequential decrease in industry refinance volumes."
- Default Services revenue up slightly "due mostly to seasonality within Field Services."
- Maintain a minimum EBITDA margin of about 20% - "focused on re-engineering the business to get more efficiency" while adapting to changing volumes.
- Should see improved margins from the first quarter.