More Mortgages and Trucks for Scopia

Scopia Capital, a fund managed by Matt Sirovich and Jeremy Mindich, has increased the size of its position in PHH Corporation (NYSE:PHH), a company providing mortgage and fleet management services, to 6.3 million shares. Scopia now owns nearly 11% of the shares outstanding of the $1.3 billion market cap company. At the end of June, the fund had reported owning 5.6 million shares on its 13F filing; this had been unchanged from what it had owned at the beginning of April, so it is somewhat significant that the fund is making a move here. With PHH nearly doubling in price so far in 2012- it is up 95% year to date- Scopia is not merely doubling down either. The fund has about $2 billion in assets under management, and PHH was one of its ten largest positions by market value according to the 13F (research more of Scopia’s top stocks).

A net gain on mortgage loans caused PHH’s net revenue to rise 8% in the second quarter of the year compared to the same period a year ago, counteracting the effects of higher loan servicing losses. With a similar pattern playing out in the first quarter, PHH Corporation ended up with 13% higher net revenue in the first half of 2012. The company did lose more money last quarter than in Q2 2011, but its $18 million in net income for the first six months is higher than in the same period last year and comes out to 31 cents per share. Cash flow from operations is down as the company uses more cash on originating mortgage loans. PHH trades at 9 times earnings estimates for 2013, as over that full year it is expected to turn in $2.35 per share. It also carries a discount to book value: its P/B ratio, which compares the market price of the stock to its book value, is 0.8.


Alan Fournier’s Pennant Capital Management was another major investor in PHH Corporation, owning 5.5 million shares at the end of the second quarter- roughly the same number that Scopia owned at that time (find more stocks owned by Pennant Capital Management). Fine Capital Partners, managed by Debra Fine, increased its stake b y 7% over the course of the quarter to a total of 2.4 million shares. It was one of Fine and her team’s ten top picks (see more stocks Fine Capital Partners likes).

PHH’s peers include commercial lenders ORIX Corporation (NYSE:IX), CIT Group Inc. (NYSE:CIT), and CapitalSource, Inc. (NYSE:CSE). We can also compare it to Bank of America Corp (NYSE:BAC), as the megabank competes with PHH’s core operations. On an earnings basis, Bank of America is about even with PHH at a forward P/e of 10; however, its P/B value is considerably lower at 0.5. If an investor does not mind having exposure to Bank of America’s other businesses- notably investment banking, an industry which has been struggling- it might be a cheaper stock. CIT and CapitalSource trade roughly at the book value of their equity, and are a bit more expensive than PHH in relation to earnings estimates as well given that their forward multiples range from 11 to 13. With CIT unprofitable, and CapitalSource seeing a small decline in revenue last quarter compared to a year ago, we like PHH better than these stocks. Japan-based ORIX, which is the highest-valued of the commercial-focused lenders at an $11billion market cap, is quite attractive on a financial basis. It trades at trailing and forward P/Es of 10 and 7, respectively; there is a discount to book value, with a P/B of 0.6; a 6% increase in revenue in its most recent quarter compared to the same period in 2011 helped drive earnings up 50%.

On an absolute basis, Scopia doesn’t look that bad- fairly cheap on the basis of either forward earnings or book value. We are a bit concerned with the company’s recent business performance, and think that investors should check out ORIX instead to see if its performance can be sustained.