Impac Mortgage May Profit From Lower Rates

| About: Impac Mortgage (IMH)

Summary

Mortgage rates are slipping into territory that should boost refinance activity.

At a 10x adjusted P/E multiple, this stock is worth $30.

Insiders are buying above the current price.

Impac Mortgage Holdings, Inc. (NYSEMKT:IMH) is a $136.78M market cap financial sector company with annual mortgage originations of nearly $10 billion. The company's primary business is Mortgage Originations and Warehousing. The enterprise value of the company is estimated to be $5.49B. The stock qualifies as a Micro Cap investment, due to the market cap being between $50 and $300 million. Based on one or more measures of stock valuation, this stock may be a potential winner in the long-run.

Interest rates are a big driver of this business. The company has not been holding much of their mortgage servicing portfolio recently, preferring to sell those rights to other servicers. Instead, they are focusing on building out the nationwide presence of the business under the CashCall brand. Since they originate FHA and GSE loans, the current drop in rates may boost refinance activity and increase profitability.

Since December, the 10-year Treasury rate has dropped from highs near 2.36% to about 1.89% currently. This is despite an attempt by the Federal Reserve to raise rates. In fact, rates are approaching levels from 1st Quarter 2015, when the company reached an epic level of profitability.

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As expressed in another recent article, there are balance sheet items that need to be cleaned up for a full valuation on the stock. However, shareholders should take note that the company has a valuation allowance on their deferred tax asset of nearly $140 million and when this is recognized, it will flow through the income statement as a profit before ending up in book value. The valuation allowance amounts to more than $10 per share.

Valuation

The trailing P/E ratio is simply price divided by historical earnings. Low P/E ratios are preferred. As a value stock, this stock fits the mold with a surprisingly low P/E of 2.29. Few companies trade at such a low multiple. Regarding the forward P/E ratio, there are no Wall Street analysts following this stock. Therefore, forward-looking earnings estimates are not available.

The price to book ratio shows a very quick and simple method for judging a stock's value. It's simply price divided by book value. A value stock might trade at a low price to book ratio. The stock currently has $10 per share in book value. The P/B ratio of 1.21 is not providing much evidence of value. However, these metrics do not account for the $51.7 million in preferred stock liquidation value, $140 million (estimate) deferred tax asset, and remaining $40 million (estimate) in long-term debt that needs to be written up on the balance sheet. Taking these items into account, the adjusted book value per share is closer to $11.50.

Insider Buying

They say that there are many reasons for an insider to sell stock, but there is only one reason to buy it. So, generally speaking, when someone like Dick Pickup purchases 70,000 shares in January 2016, you have to take note. This buying may be evidence of good things coming. The Pickup family now holds about 4,732,578 total shares worth an estimated $57,074,890. This is more than 1/3rd of the float. Given the average trading volume of 59,000 shares, they are not likely to sell any shares into this market.

Technical Perspective

Technical data can help an investor understand the stock's current momentum and pricing trends. With the stock trading near $12.06 per share, the stock is about 4.7% above the 52-week low of $11.51. In the past 52 weeks, the stock traded as high as $29.85 and the current price level is 59.6% lower than that high. The stock appears to be oversold, trading below the 20-day moving average ($14.33), 50-day moving average ($16.78), and 200-day moving average ($18.42).

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Recent candlestick chart patterns indicate that the momentum may be turning. On February 3rd, the stock formed a bullish hammer reversal pattern, followed by a day of strong buying.

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Going back one year, you can see that the current level seems to be consistent with prices before the stock broke out to a high near $29 per share. This price movement was the result of the company reporting quarterly earnings of $2.94 on profits of $34 million. These results came shortly after full-year 2014 results included a loss of $6.3 million. The operational turnaround came from the acquisition of CashCall and this event has driven a 300% increase in sales throughout 2015.

Target Price

A full valuation on this stock would be driven by a multiple of operating earnings. In 2015, expect $40 million in operating earnings for the year. That's about $3 per share in operating EPS. At a 10x multiple, the stock is worth $30, although there are overhangs that may affect valuation until resolved. Investors should take note of the current weakness in overall markets and average into a position with this stock and others.

Disclosure: I am/we are long IMH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long preferred and common (through call options).