Profits, Bailout Plan or Not
Even when the market drops 778 points, there are stocks worth considering. In fact, Lender Processing Services does well because Wall Street took such a hard hit on Monday.
Remember, mortgages are at the center of this market mess, and LPS makes part of its money through default-management services, which involves helping banks with foreclosures and property inspections. After Congress today voted down Paulson’s bailout plan, there’s a good chance we’ll be seeing even more foreclosures in the near future.
These default services made up 16% of LPS’s 2005 revenues, but by 2007 the number had jumped to 28%. And while the company’s closest competitor, First American, saw its business grow 44% year-over-year in the second quarter, LPS grew by 100%.
Even if Congress does finally agree on a bailout, LPS could still work. There’s a 12 month to 18 month lag between a borrower default and when the company stops making money. So revenues should carry the business through much of 2009. Cramer doesn’t agree with LPS’s assessment that defaults won’t slow until 2011, but in a worst-case scenario, that’s just more reason to consider the stock.
Add to this that the third quarter is about to end and with it come rate resets on adjustable-rate mortgages. There’s a good chance more foreclosures will follow as homeowners struggle to keep up with increased mortgage payments, and that means more business for LPS.
Keep in mind, too, that LPS also handles the other side of foreclosures – mortgage creation. So even if the plan passes, and housing finds a bottom and people feel safe enough to buy again, then LPS will, again, see more business. The same goes for the rate resets. Those could just as well lead to more refinancing as opposed to foreclosures, leading banks to call on LPS for its services.
The one drawback, Cramer said, is that bank consolidation could lead to a loss of customers for LPS. But then again, that means opportunity, too. Bank of America had planned to use Countrywide’s internal mortgage-processing system, which would have cost LPS $50 million a year in sales. But LPS is trying to win back that business, along with Countrywide’s, which would add $60 million $70 million in sales to the books.
Bank of America or not, defaults aren’t going away, Cramer said. And it’s actually cheaper for banks to use LPS than it is for them to process these mortgages and foreclosures themselves. Then there’s the agreement New York’s attorney general made with Fannie Mae and Freddie Mac that they could only buy loans from banks that use independent means for appraising homes, i.e., use companies like LPS.
LPS trades at just 11 times earnings because of a pullback due to that fear of bank consolidation. But given the current market situation, Cramer thinks investors will get an even better entry point. He urged them to wait for it.
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