December 23, 2011 | 7 Pages
Specialty Finance Company Report
PHH Corp.
(NYSE: PHH)
FOCUS ON CASH-LIQUIDITY GENERATION; LOWERING RATING: BUY
ESTIMATES Henry J. Coffey, Jr., CFA Jason P. Weaver
(615) 760-1472 (615) 760-1475
Raising Cash in 2012 & 2013 hcoffey@sterneagee.com jweaver@sterneagee.com
The crux of S&P’s downgrade of the company notes to BB- is Calvin Hotrum
tied to the company’s ability to raise the required liquidity to pay (615) 760-1476
off $423 million in term notes due in 2013. We have identified chotrum@sterneagee.com
approximately two ways in which the company could originate
$240+ in cash in 2012 and $350+ in cash in 2013. We think a Fiscal Year Ends Dec
high-yield debt offering and lengthening of current line of credit
maturities could cover any shortfall in both years. Rating: Buy
Step 1: Access Restricted Cash Price: Close $11.11
At the end of September, PHH’s mortgage reinsurance subsidiary Price Target: $24
accounted for $234 million and the leasing operation accounted 52-wk Range: $8.75-$25.55
for $258 million of the company’s restricted cash. Based on Market Capitalization (M): 626.0
reported reserves of $94 million, we estimate that the sale /ceding Shares Outstanding (M): 56.3
of this insurance could raise $140 million in 2012. We estimate if Avg. Daily Vol. (000): 12,625.0
the company stops originating new leases, the asset-backed debt Tangible Book Value/Share: $24.28
funding these could be paid off in 2013 and the leasing Price/Tangible Book Value: 46%
operation’s restricted cash released by the end of 2013.
Assets (B): $ 8.5
Step 2: Cash Flow from Operations
In most years we estimate the company generates $100+ million
in operating cash flow. We think some of the cash drain created
by funding MSRs could be offset through a partnership in which
a REIT or investment fund holds a senior stake in the company’s Earnings Summary
MSR (mortgage servicing rights) and PHH is the designated sub FYE Dec 2011E 2012E 2013E
servicer.
EPS & P/E Summary
Concerns Over Fannie Line not an issue 2011 2012 2013
We believe that anyone with PHH’s track record originating EPS: 2011E Prior 2012E Prior 2013E Prior
agency mortgages and the cash to invest in MSRs is not going to Q1 $0.61 -- $0.12 $0.50 -- --
have trouble funding originations until they are sold. PHH’s Q2 $0.50 -- $0.61 $0.71 -- --
servicer ratings are above average and its delinquencies more Q3 $1.14 -- $0.79 $0.71 -- --
than half that of the big five servicers. The company has $2B+ in Q4 $0.75 -- $0.97 $0.78 -- --
committed mortgage warehouse lines that are not subject to a Full Year $3.00 -- $2.50 $2.70 $2.75 $3.00
rating change and has met the steps required to renew its bank P/E Ratio: 3.7x -- 4.4x -- 4.0x --
line in February ’12.
Lowering Estimates; Liquidation value = $17+
We think one likely step towards building liquidity for the
company will be slowing its mortgage production and leasing
activity. Reflecting this, we are reducing the 2012 core EPS
estimate to $2.50 from $2.70 and reducing the 2013 estimate to
$2.75 from $3.00. Our ROE analysis suggests the stock is worth
tangible book and our liquidation analysis points to a value of
$17+ per share. We reiterate our BUY rating.
Source: Factset
Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification,
Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section.
800 Shades Creek Parkway Suite 700 Birmingham, AL 35209 205-949-3500
Sterne, Agee & Leach Inc. is Member NYSE, FINRA, SIPC
PHH CORP. (NYSE: PHH) December 23, 2011
Exhibit—Cash Flow From Operations and Other Items
PHH Corp. FY09 FY10 1Q11 2Q11 3Q11 4Q11E FYE11E FY12E FY13E
Diluted EPS $2.77 $0.86 $0.84 ($0.73) ($2.62)
Core EPS $2.60 $3.01 $0.61 $0.50 $1.14 $0.75 $3.00 $2.50 $2.75
ROE Core 10.2% 10.8% 8.5% 7.2% 16.9% 12.0% 11.3% 9.5% 9.4%
Adjusted EBITDA
Mortgage Segment $91 $111 -$111 $25 $75 $28 $17 $97 $109
Fleet $65 $74 $19 $21 $24 $19 $83 $109 $118
Combined $156 $185 -$92 $46 $99 $47 $100 $206 $227
ROC 5.4% 6.6% -12.9% 6.4% 14.0% 6.7% 3.5% 6.9% 6.9%
Mortgage Production
Loans Closed-$ billions $37.6 $49.0 $13.8 $9.7 $12.7 $14.3 $50.6 $48.9 $48.9
Overhead to Loans Closed 1.5% 1.3% 1.1% 1.4% 1.2% 1.1% 1.2% 1.2% 1.2%
Net Cost of Excess MSR 1 34% 34% 104% 54% Csh P 21% 50% 38% 42%
Total Servicing-$ B UPB $151 $166 $171 $174 $178 $186 $186 $207 $224
Servicing EBIT $31 $114 $34 $49 $39 $42 $164 $181 $190
EBIT return on MSRs 2.3% 8.0% 9.0% 12.7% 11.5% 13.3% 11.6% 12.7% 11.2%
Components of Adj EBITDA & Cash Flow from Operations
Production EBITDA ($100) ($75) ($163) ($24) $24 ($14) ($177) ($99) ($128)
Servicing EBITDA $331 $339 $91 $91 $88 $87 $357 $354 $391
Fleet EBITDA $1,421 $1,389 $345 $351 $350 $345 $1,391 $1,424 $1,455
Combined $1,652 $1,653 $273 $418 $462 $418 $1,571 $1,679 $1,718
Less
Put Back Expense ($70) ($72) ($15) ($24) ($20) ($27) ($86) ($89) ($89)
Direct Mort Int Exp ($70) ($81) ($24) ($18) ($17) ($18) ($77) ($69) ($65)
Leasing Int Exp ($89) ($91) ($20) ($21) ($19) ($19) ($79) ($79) ($83)
Lease Dep. ($1,267) ($1,224) ($306) ($309) ($307) ($307) ($1,229) ($1,237) ($1,255)
= Adj EBITDA $156 $185 ($92) $46 $99 $47 $100 $206 $227
Corp Dep & Amort. $26 $22 $6 $25 $24 $25
Corp Int Exp. ($77) ($102) ($30) ($30) ($31) ($31) ($122) ($128) ($132)
Operating CF $105 $105 ($122) $16 $68 $22 $3 $102 $120
Direct Debt and Capital
Leasing (AB) $2,892 $3,066 $2,995 $3,015 $2,933 $2,976 $2,976 $3,148 $3,320
Mortgage (AB) $996 $3,777 $1,152 $1,428 $2,287 $2,287 $2,287 $2,287 $2,287
Total Direct Debt $3,888 $6,843 $4,147 $4,443 $5,220 $5,263 $5,263 $5,435 $5,607
Corporate Debt $1,272 $1,242 $1,248 $1,254 $1,341 $1,411 $1,411 $1,511 $1,636
Tangible Equity $1,441 $1,517 $1,577 $1,539 $1,383 $1,427 $1,427 $1,574 $1,735
Total Invested Capital $2,776 $2,820 $2,885 $2,852 $2,783 $2,897 $2,897 $3,144 $3,430
Total Debt/Tang Equity 3.6x 5.3x 3.4x 3.7x 4.7x 4.7x 4.7x 4.4x 4.2x
Total Servicing-$B UPB $151 $166 $171 $174 $178 $186 $186 $207 $224
Capitalized Servicing-$ B UPB $130 $140 $141 $142 $144 $146 $146 $151 $154
MSRs $1,413 $1,442 $1,590 $1,508 $1,198
% of Servicing 1.1% 1.0% 1.1% 1.1% 0.8%
Multiple on contractual serv. 3.6x 3.4x 3.8x 3.5x 2.8x
MSR Per Share $25.80 $25.89 $28.29 $26.77 $21.26
Tangible Book $26.09 $26.98 $27.84 $27.16 $24.28
Source: SA Estimates & Company Reports
$ in millions except where noted
1 net cost/MSR=adjusted segment EBITDA (excludes gain on sale)/capitalized excess servicing. Cash P=cash profit
Page 2
PHH CORP. (NYSE: PHH) December 23, 2011
Exhibit—Valuation
Two points worth noting: 1) by our analysis the market is valuing PHH’s MSRs at 1.1x
contractual servicing. We believe they could be sold for between 2.0x and 2.5x. 2)
Assuming the value of the mortgage arm is just its MSR value and factoring out of the
valuation of the company’s fleet business, PHH’s deferred tax liability we would place a
liquidation valuation for this company at $17+ per share
PHH $11.11 Price
PHH - Valuation
2011E 2012E 2013E
Core EPS $3.00 $2.50 $2.75
PE 3.7x 4.4x 4.0x
P/TB Tang Bk $24.28 46%
P/MSR Per Share MSR per S $21.26 52%
Implied Value of Servicing Price less Mrkt
Price (TB Less MSR = Net Bk) Net Bk= Premium
$11.11 $24.28 ($21.26) $3.02 $8.09
Shares 56.3
Maket Value MSR $456
Owned Servicing $144,275
Premium 0.32%
Contractual Serv. 30bp
Servicing Multiple 1.1x
PHH - Estimated Share Value
Liquidation Value
Mortgage Business Fee x Premium Serv Msr
MSR 30bp 2.25x 0.68% $144,275 $974
Shares 56.3
Mortgage Business = Value of MSR $17.28
Fleet 2012
Adjusted EBITDA $109
Multiple 6.25x
Enterprise Value $679.9
Less deffered tax liability ($621.0)
Net Value $58.9
Shares 56.3
Value per share $1.05
Combined Liquidation Value $18.33
Less other net liabilites ($0.94)
Liquidation Value = $17.39
Vauation Core EPS 2011E 2012E 2013E
Core EPS $3.00 $2.50 $2.75
Target PE (median large comm bank) 8.2x 8.2x 8.2x
Value $24.61 $20.50 $22.52
Source: SA Estimates & Com pany Reports, Factset, SNL
$ in m illions except where noted
Page 3
PHH CORP. (NYSE: PHH) December 23, 2011
PHH Corp. Quarterly Income Statement
PHH Corporation Income Statement
$ in Millions Except Per-Share amts 4Q11E FY11E 1Q12E 2Q12E 3Q12E 4Q12E FY12E FY13E
Revenues
Mortgage fees O $78.7 $288.7 $58.0 $69.6 $75.4 $80.6 $283.6 $283.6
Fleet management fees F $42.0 $170.0 $45.4 $47.5 $45.4 $45.4 $183.6 $194.2
Net fee income $120.7 $458.7 $103.4 $117.1 $120.8 $126.0 $467.2 $477.8
Fleet lease income F $340.0 $1,390.0 $340.0 $360.2 $360.2 $360.2 $1,420.5 $1,440.6
Gain on mortgage loans, net O $201.3 $582.3 $111.5 $133.8 $144.9 $155.0 $545.1 $539.3
Mortgage interest income O $26.1 $108.1 $24.7 $29.0 $31.2 $33.3 $118.2 $120.0
Mortgage interest expense O -$49.1 -$199.1 -$49.1 -$49.1 -$49.1 -$49.2 -$196.5 -$196.9
Mortgage net finance expense -$23.0 -$91.0 -$24.4 -$20.1 -$17.9 -$15.9 -$78.3 -$76.9
Loan servicing income S $114.2 $451.2 $114.3 $116.1 $120.0 $124.9 $475.3 $544.2
Amort of MSRs -$44.9 -$192.9 -$39.1 -$40.7 -$42.6 -$50.5 -$172.9 -$200.7
Fair Value Adjustments & Derv - (452.00) - - - - - -
Change in FV MSR S -$44.9 -$644.9 -$39.1 -$40.7 -$42.6 -$50.5 -$172.9 -$200.7
Net loan servicing income S $69.3 -$193.7 $75.2 $75.5 $77.4 $74.4 $302.4 $343.4
Other income $25.0 $152.0 $30.0 $30.0 $30.0 $30.0 $120.0 $106.0
Net revenues $733.2 $2,298.2 $635.6 $696.5 $715.3 $729.5 $2,776.9 $2,830.2
Expenses
Salaries and related expenses -$128.2 -$503.2 -$128.4 -$128.5 -$123.8 -$123.1 -$503.8 -$507.8
Occupancy and other office expenses -$14.5 -$58.5 -$14.5 -$14.5 -$14.5 -$14.5 -$58.0 -$62.0
Depreciation on operating leases F -$307.0 -$1,229.0 -$307.0 -$310.0 -$310.0 -$310.0 -$1,237.0 -$1,254.5
Fleet interest expense F -$18.9 -$78.9 -$19.2 -$19.5 -$19.8 -$20.0 -$78.5 -$82.9
Other depreciation and amortization -$6.0 -$25.0 -$6.0 -$6.0 -$6.0 -$6.0 -$24.0 -$25.2
Other operating expenses -$168.5 -$536.5 -$142.1 -$151.6 -$157.0 -$154.0 -$604.7 -$602.8
Total expenses -$643.1 -$2,431.1 -$617.2 -$630.1 -$631.0 -$627.7 -$2,505.9 -$2,535.2
Income before income taxes $90.1 -$132.9 $18.4 $66.4 $84.3 $101.9 $271.0 $295.0
Income tax expense 40% -$36.0 $64.0 -$7.4 -$26.5 -$33.7 -$40.8 -$108.4 -$118.0
Tax Rate 40% 48% 40% 40% 40% 40% 40% 40%
Net income $54.1 -$68.9 $11.0 $39.8 $50.6 $61.1 $162.6 $177.0
Less: net income attributable to noncontrolling interest -$10.0 -$27.0 -$4.0 -$4.0 -$4.0 -$4.0 -$16.0 -$16.0
Net income attributable to PHH Corporation $44.1 -$95.9 $7.0 $35.8 $46.6 $57.1 $146.6 $161.0
FD Shares 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6
Diluted EPS - Reported $0.75 ($1.76) $0.12 $0.61 $0.79 $0.97 $2.50 $2.75
Diluted EPS - Core $0.75 $3.00 $0.12 $0.61 $0.79 $0.97 $2.50 $2.75
Source: SA Estimates & Company Reports
Page 4
PHH CORP. (NYSE: PHH) December 23, 2011
APPENDIX SECTION
Company Description: PHH is one of a short list of public companies focused almost exclusively on mortgage
originating/mortgage servicing. In addition, it operates a lease leasing and servicing business. The mortgage production segment
operates through a variety of origination channels where, in partnership with affiliated groups, it underwrites what are predominantly
conforming mortgages. The Fleet management business provides small vehicle leasing to Fortune 500 companies and other high
volume/high quality companies.
IMPORTANT DISCLOSURES:
Price Target Risks & Related Risk Factors:
The mortgage business is the target of regulatory scrutiny and litigation; to date PHH has been left out of ongoing investigations, but
this remains a risk/headline factor. The company's two core businesses are highly cyclical and capital intensive.
Valuation Methodology:
Our price target is based on our estimated liquidation value of the company MSRs. We are valuing all the other assets at estimated
book value and assuming the servicing operation is worth its MSR value. In this approach to valuation we are not attributing any
value of meaning to the company's origination capacity and not factoring in the likely value associated with the expected growth of the
Fleet management business. In addition we looked at other traditional metrics of valuation such as P/Es and price to book multiples.
Regulation Analyst Certification:
I, Henry J. Coffey, Jr., CFA, (615) 760-1472, Jason P. Weaver, (615) 760-1475, Calvin Hotrum, hereby certify the views expressed in
this research report accurately reflect my personal views about the subject security(ies) or issuer(s). I further certify that no part of my
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this
report.
Sterne, Agee & Leach, Inc. Disclosure Legend as of December 23, 2011:
Company Disclosure(s) – See Below
PHH Corp. (PHH - NYSE): 1
Disclosure Legend
1. Sterne, Agee & Leach, Inc. makes a market in the shares of the subject company.
2. Sterne, Agee & Leach, Inc. has, over the past 12 months, managed or co-managed a public securities offering or
provided other investment banking services for the subject company.
3. Sterne, Agee & Leach, Inc. received compensation for products or services other than investment banking services
from the subject company in the past 12 months.
4. The Sterne Agee analyst who has active coverage on this company owns a position in the subject company.
5. Sterne, Agee & Leach, Inc. or its affiliates beneficially own 1% or more of any class of common equity securities of the
subject company.
Sterne Agee & Leach, Inc. expects to receive or intends to seek compensation for investment banking services from the subject
company in the next three months. Sterne, Agee & Leach, Inc.’s research analysts receive compensation that is based upon various
factors, including Sterne, Agee & Leach, Inc.’s total revenues, a portion of which is generated by investment banking activities.
Definition of Investment Ratings:
BUY: We expect this stock to outperform the industry over the next 12 months.
NEUTRAL: We expect this stock to perform in line with the industry over the next 12 months.
UNDERPERFORM: We expect this stock to underperform the industry over the next 12 months.
RESTRICTED: Restricted list requirements preclude comment.
Ratings Distribution:
Of the securities rated by Sterne, Agee & Leach, Inc., as of September 30, 2011, 51.4% had a BUY rating, 44.4% had a NEUTRAL
rating, 3.2% had a UNDERPERFORM rating, and 0% was RESTRICTED. Within those ratings categories, 3.8% of the securities
rated BUY, 1.1% rated NEUTRAL, 0% rated UNDERPERFORM, and 0% rated RESTRICTED received investment banking services
from Sterne, Agee & Leach, Inc., within the 12 months preceding September 30, 2011.
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST: Contact Robert Hoehn at 1-212-338-4731.
Appendix Section, Page I
PHH CORP. (NYSE: PHH) December 23, 2011
Other Disclosures:
Opinions expressed are our present opinions only. This material is based upon information that we consider reliable, but we do not
represent that it is accurate or complete, and it should not be relied upon as such. Sterne, Agee & Leach, Inc., its affiliates, or one or
more of its officers, employees, or consultants may, at times, have long or short or options positions in the securities mentioned herein
and may act as principal or agent to buy or sell such securities.
Copyright © 2011 Sterne, Agee & Leach, Inc. All Rights Reserved.
Sterne, Agee & Leach, Inc. disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA
regulations. Price charts for companies initiated upon in the current quarter, and rating and target price changes occurring in the
current quarter, will not be displayed until the following quarter.
Price Chart(s):
To receive price charts or other disclosures on the companies mentioned in this report, please contact
Sterne, Agee & Leach, Inc. toll-free at (800) 240-1438 or (205) 949-3689.
Appendix Section, Page II
Founded in 1901, Sterne Agee has been providing investors like you with high-quality investment opportunities for over a century. During the
early years, our founders prominently established themselves in the financial securities industry in the southeastern United States. Today, we
have expanded to serve all regions of the country. Sterne, Agee is headquartered in Birmingham, Alabama with offices in 22 states. Sterne
Agee is one of the largest independent firms in the country. Sterne, Agee & Leach, Inc. is a division of Sterne Agee Group, Inc., which also
includes The Trust Company of Sterne, Agee & Leach, Inc.; Sterne Agee Asset Management, Inc.; Sterne Agee Clearing, Inc.; and Sterne Agee
Financial Services, Inc.—www.sterneagee.com
EQUITY CAPITAL MARKETS
Ryan Medo Managing Dir., Eq. Cap. Mkts. (205) 949-3623 William McIlroy Director, Equity Products (212) 338-4781
Paul Garner Associate (212) 338-4799
INSTITUTIONAL SALES INSTITUTIONAL TRADING
Steve Pokorny Head of Institutional Sales (214) 702-4020 JT Cacciabaudo Head of Trading (212) 763-8288
EQUITY RESEARCH
Robert Hoehn Director of Research (212) 338-4731
CONSUMER FINANCIAL SERVICES (CONT.)
Apparel Retailing & Toys Property/Casualty Insurance
Margaret Whitfield SVP, Sr. Analyst (973) 519-1019 Dan Farrell Mng. Dir. (212) 338-4782
Tom Nikic, CFA Analyst (212) 338-4784 Nitin Chhabra, FCAS Analyst (212) 338-4779
Educational Services / Interactive Entertainment GLOBAL INDUSTRIAL INFRASTRUCTURE (GII)
Arvind Bhatia, CFA Mng. Dir. (214) 702-4001
ACME & Latin America
Brett Strauser Analyst (214) 702-4009
Ben Elias, CFA SVP, Sr. Analyst (212) 338-4706
Footwear & Apparel Ali-Ahmad Faghri Associate (646) 376-5304
Sam Poser Mng. Dir. (212) 763-8226
Aerospace
Kenneth M. Stumphauzer, CFA Sr. Analyst (212) 763-8287
Peter Arment Mng. Dir. (646) 376-5336
Leisure & Entertainment Josh W. Sullivan Analyst (646) 376-5337
David Bain Mng. Dir. (949) 721-6651
Sherry Yin Associate (949) 721-6651 Auto, Auto Parts and Auto Retailers
Michael P. Ward, CFA Mng. Dir. (646) 376-5375
Restaurants
Lynne Collier Mng. Dir. (214) 702-4045 Coal, Metals & Mining, Engineering & Construction
Philip May Analyst (214) 702-4004 Michael S. Dudas, CFA Mng. Dir. (646) 376-5329
Satyadeep Jain Analyst (646) 376-5357
ENERGY Patrick Uotila, CPA Analyst (646) 376-5358
Exploration & Production
Michael J. McAllister Mng. Dir. (212) 338-4783 Construction Materials & Diversified Industrials
Tim Rezvan, CFA Analyst (212) 338-4736 Todd Vencil, CFA SVP, Sr. Analyst (804) 282-7385
Ryan Mueller Associate (212) 338-4732 Kevin Bennett, CFA Analyst (804) 282-4506
Oilfield Services & Equipment HEALTHCARE
Stephen D. Gengaro Mng. Dir. (646) 376-5331 Pharmaceutical Services
Grant Fox Associate (212) 338-4723 Greg T. Bolan Mng. Dir. (615) 760-1469
Himanshu Rastogi, CFA Associate (615) 509-2652
FINANCIAL SERVICES
Asset Management TECHNOLOGY
Jason Weyeneth, CFA SVP, Sr. Analyst (212) 763-8293 Data Networking and Storage
Charles Warren Analyst (646) 376-5309 Alex Kurtz Mng. Dir (415) 402-6015
Amelia Harris Analyst (415) 402-6018
Banks & Thrifts
Matthew Kelley Mng. Dir. (207) 699-5800 Financial Technology
Mike I. Shafir SVP, Sr. Analyst (212) 763-8239 Greg Smith Mng. Dir (818) 615-2029
Matthew Breese Analyst (207) 699-5800 Jennifer Dugan Analyst (415) 402-6051
Brett Rabatin, CFA SVP, Sr. Analyst (877) 457-8625
Kenneth James Analyst (615) 760-1474 Hardware, Mobile Devices, IT Supply Chain
Nathan Race Associate (615) 760-1477 Shaw Wu SVP, Sr. Analyst (415) 362-7431
Peyton Green Mng. Dir. (877) 492-2663
Zachary Wollam Analyst (615) 760-1468 LED Supply Chain
Todd L. Hagerman Mng. Dir. (212) 338-4744 Andrew Huang Mng. Dir. (415) 362-6143
Robert Greene Analyst (212) 763-8296 John Shen Associate (415) 402-6052
Semiconductors
Life Insurance Vijay Rakesh Mng. Dir. (312) 525-8431
John M. Nadel Mng. Dir. (212) 338-4717 Mark Kelley Analyst (312) 525-8430
Alex Levine Associate (212) 338-4748
TRANSPORTATION, SERVICES & EQUIPMENT
Mortgage Finance & Specialty Finance Jeffrey A. Kauffman Mng. Dir. (212) 338-4765
Henry J. Coffey, Jr., CFA Mng. Dir. (615) 760-1472 Sal Vitale VP, Analyst (212) 338-4766
Jason Weaver Analyst (615) 760-1475 Kanchana Pinnapureddy Associate (212) 338-4767
Calvin Hotrum Associate (615) 760-1476
Email Address for Sterne Agee Employees: first initial + last name@sterneagee.com (e.g., jsmith@sterneagee.com)