Wedbush Downgrades Rocket Companies, Cuts Earnings Estimates Through 2023

Rocket Companies Inc RKT traded lower Tuesday after the retail mortgage giant received its second Wall Street downgrade in just over a week.

The Analyst: Wedbush analyst Henry Coffey downgraded Rocket Companies from Neutral to Underperform and cut his price target from $14 to $12.

The Thesis: Coffey said Rocket is facing a difficult environment in which mortgage market volumes will be falling while competitive pressures persist.

“A look at the consensus view on residential mortgage (the combined outlooks of Fannie, Freddie, and the MBA) suggests that over the next several years, we are heading into exactly the sort of market for which RKT's well designed direct-to-consumer (DTC) platform is not optimized: a dramatic fall off in refinance/cash-out refinance and slowing levels of purchase-related mortgages,” Coffey wrote in a note.

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

Coffey said the consensus outlook for the 2021 mortgage market is for only a modest decline from record 2020 volumes. However, the outlook worsens significantly in 2022, when analysts are calling for total volumes to fall by 29% and purchase related mortgage growth to slow from 15% to 7%.

The Wedbush downgrade comes just over a week after Jefferies downgraded Rocket from Buy to Hold and said they expect an extended retail mortgage pricing war ahead that could weigh on margins.

Wedbush has now lowered its 2021, 2022 and 2023 EPS estimated for Rocket from $2, $145 and $1.38 to $1.85, $1.18 and $1.20, respectively. Coffey is projecting revenue will fall 24.5% in 2022 and another 4% in 2023.

Benzinga’s Take: The extremely low forward earnings multiples among Rocket Companies 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.