Analyst Downgrades Rocket Companies, Says Refinancing Mortgage Volumes 'Likely Headed Meaningfully Lower'

Investors are expecting interest rates to start rising sharply in coming months, and one analyst said Tuesday that rising rates are bad news for Rocket Companies Inc RKT.

The Analyst: Bank of America analyst Mihir Bhatia downgraded Rocket from Neutral to Underperform and cut the price target from $21 to $11.

Bhatia also reiterated his Underperform rating for mortgage originator Home Point Capital Inc HMPT and cut the price target from $5 to $4.

Related Link: Rocket Companies Expands Fintech Presence With $1.27B Truebill Acquisition

The Takeaways: In the downgrade note, Bhatia said Rocket will be at the mercy of a very difficult economic environment for the foreseeable future. The average rate on a 30-year mortgage has already risen from an average of 3.09% in 2021 to around 4.19% today, Bhatia said.

Rising interest rates will likely drive mortgage volumes down in 2022, and Bhatia said consensus analyst earnings estimates for Rocket could be at risk.

"While we admire RKT’s best-in-class technology platform and its strong retail franchise, which we think offers better margin protection than peers, near-term results will be impacted by the hostile market backdrop," Bhatia said.

Rocket has been investing to expand outside the mortgage business, including its recent acquisition of Truebill. Yet refinancing mortgages make up about 85% of Rocket's total origination volume, and Bhatia said investors can expect refi mortgages to head "meaningfully lower" as interest rates continue to rise.

Bank of America is now projecting Rocket's revenue will drop 17% in 2022, while EPS drops 35% year-over-year.

RKT Price Action: Rocket Companies shares were trading down 5.34% at $11.88 Tuesday morning. 

Benzinga's Take: There's no question the mortgage market will face tremendous pressures in 2022. Yet with Rocket shares already down 41.1% in the last year, the stock may soon become an attractive value play for investors given it is trading at under 8 times Bank of America's updated 2022 EPS estimate of $1.50.