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Value Traps: Altisource Portfolio Solutions (ASPS)

|Includes: Altisource Portfolio Solutions SA (ASPS)

"Altisource Portfolio Solutions S.A. is a marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries. The Company operates through three segments: Mortgage Services, Financial Services and Technology Services. The Company's Mortgage Services segment provides services that span the mortgage and real estate lifecycle, and are outsourced by loan servicers, loan originators, home investors, and other sellers and buyers of single family homes. The Company's Financial Services segment provides collection and customer relationship management services to debt originators and servicers (credit card, auto lending, retail credit and mortgage) and the utility, insurance and hotel industries. Technology Services segment provides a portfolio of software, data analytics and infrastructure management services that support the management of mortgage and real estate activities and marketplace transactions across the mortgage and real estate lifecycles."

ASPS was part of the Ocwen family and has collapsed SPECTACULARLY. Now that Ocwen has been barred from purchasing MSRs, people think the market has overreacted given the decline in ASPS.

I think ASPS is a value trap. The current market cap is $550MM. Debt stands at around $475MM, with a solid cash position of $159MM. 2017 EBITDA is projected at around $169MM, so debt to EBITDA stands around 1.9X, which isn't bad. So leverage isn't a big problem here and bankruptcy isn't a likely outcome.

If you look at slide 3, they provide the bottom line:

"2021 Service Revenue of $1.87 billion, assumes 40% annual growth of non-Ocwen revenue from the mid-pojnt of the 2016 scenarious and $260 million of service revenues from Ocwen."

I don't think 40% YoY growth for five years is conservative. And further, the $260MM of Ocwen revenue may be optimistic, but almost surely will be short lived unless Ocwen starts buying MSRs again.

Random thoughts / details:

The business itself is largely Morgage Servicing, for Ocwen and non-Ocwen clients. Origination Solutions, Consumer Real Estate Solutions, and Financial Services are a small part of the total business. If you look at 2015, $743MM of servicing revenues came from Ocwen, $53MM from non-Ocwen.

So you could buy ASPS based on it being cheap based on a run-off value of the Ocwen portfolio. But that's going to assume you can value the run off values well, given the Ocwen portfolio is complex.

The non-Ocwen servicing revenues is growing but TINY. So this becomes a SOTP analysis.

Management provides some of this on slide 13 of the quarterly ASPS presentation. In the average scenario, Service revenue unrelated to Ocwen is $300MM. Total Service revenue comes in at $993MM.

This doesn't seem like a great asymmetric bet, which is what you want with a cheap stock. Also, this is one complex company. Not worth getting involved IMO.

There MIGHT be value here (30-50% upside), but it's not as easy . Also, growing the non-Ocwen servicing business isn't going to be easy. Off setting Ocwen revenue declines is a race against time.

Generally, valuing these kinds of businesses isn't worthwhile. These projections of FCF and earnings are difficult. Also getting too precise with valuations isn't a great idea when the core business is in decline and there's debt involved.

If you think Ocwen gets back into the MSR game, buy Ocwen. If you think ASPS can grow its non-Ocwen MSR servicing business, buy ASPS. But don't buy ASPS hoping Ocwen gets back into the business of MSRs and the market is undervaluing book value at ASPS.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.