Jefferies Downgrades Rocket Companies, Sees Extended Retail Mortgage Pricing War Ahead

Rocket Companies Inc RKT shares dropped 5.2% on Monday morning after one analyst downgraded the stock and said the company will be facing intense competition in the coming quarters.

The Analyst: Jefferies analyst Ryan Carr downgraded Rocket Companies from Buy to Hold and cut his price target from $26 to $18.

The Thesis: Carr emphasized his expectation that the retail mortgage market could experience an extended period of margin pressures.

“With a price war ongoing in the wholesale channel, we conducted a proprietary survey of mortgage brokers and found very low prices are likely to bleed into retail, while we get the sense that the war will continue past ‘22,” Carr wrote in a note.

Carr said he still believes Rocket Companies will see continued strength in sales volumes, but a pricing war could eat into the company's record earnings.

Related Link: Why Rocket Companies Stock Could Be In For A Big Breakout

Investors hoping that the pricing war would just be a temporary phenomenon were likely caught off guard when Rocket recently announced its intentions to make first-quarter price cuts permanent. Carr said the recent Jefferies survey indicates brokers are now taking advantage of falling base pricing from wholesale partners and are slashing prices themselves in an attempt to gain market share.

The current situation has compressed margins much faster than in previous mortgage market cycles, Carr said.

Looking ahead, Carr is expecting commentary from retail mortgage companies about the hyper-competitive market on second-quarter earnings calls, which could serve as a bearish near-term catalyst for mortgage stocks.

Jefferies is now forecasting average gain on sale (GOS) retail margins of about 3.3% in the second quarter, 3% in the second half of 2021.

Benzinga’s Take: The extremely low forward earnings multiples among Rocket and other mortgage stocks suggests investors are already pricing in a significant slowdown in business following a record mortgage boom in recent quarters. The bar appears to be set relatively low based on those valuations, meaning second-quarter earnings calls could also potentially trigger a relief rally if they are not as bad as feared.