LPS [NYSE: $32.38] provides technology and outsourced services to the mortgage lending industry. They deal with about half of the biggest fifty banks in America.
Since its spin-off as a separate entity in 2008 LPS has done nothing wrong. Earnings per share have progressed from 2008’s $2.41 to $2.87 in 2009 and they are on pace to hit a new record of about $3.49 this year.
Why have they been able to grow earnings right through a horrible housing market? They make a good chunk of their profits from foreclosure related services. The number of foreclosures shows no sign of declining any time soon. Consensus views for 2011 now are centered on $3.84/share.
Today’s low price of $32.38 puts LPS at just 9.3x this year’s and under 8.5x the 2011 estimate. Even during the 2008-2009 market meltdown period LPS averaged an 11.6x multiple. A rebound to even that ‘normalized’ valuation would bring LPS back up to $40.48 within six months and close to $45 over the next 18 months.
Are those reasonable targets? Sure. Lender Processing Services hit $38 in 2008 on earnings of $2.41 and touched $44.38 and $43.09 during 2009 and 2010 YTD.
Dividends were initiated in 2008 and the well-covered current yield is 1.23%.
I’m a buyer of shares and a seller of March 2011 $30, $35 and $40 puts.
‘If Put’ Price
Margin of Safety*
STO Mar. $30 puts
STO Mar. $35 puts
STO Mar. $40 puts
* percentage that ‘if put’ price is below the current $32.38 quote
Disclosure: Author is long LPS shares and short LPS options.