IPO Report: Stonegate Mortgage (SGM)

Francis Gaskins |

Stonegate Mortgate (SGM) is an integrated mortgage company that derives revenue from three principal sources: mortgage origination, mortgage financing and mortgage servicing. 

Seven IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

When segment stocks beat expectations they can run up quickly.   For example Nationstar Mortgage’s (NSM) June quarter results substantially exceeded analyst estimates and the stock ran up 48% in three months

Based in Indianapolis, IN, SGM scheduled a $181 million IPO with a market capitalization of $519 million at a price range mid-point of $21 for Thursday, October 10, 2013.

The S-1 wasbfiled September 30, 2013.  Manager, Joint Managers:  BofA Merrill; Credit Suisse; Barclays; FBR
Co-Managers:  Keefe, Bruyette & Woods (A Stifel Company); Sterne Agee.

Summary

SGM is an integrated mortgage company that derives revenue from three principal sources: mortgage origination, mortgage financing and mortgage servicing.  When segment stocks beat expectations they can run up quickly. 

For example Nationstar Mortgage’s (NSM) June quarter results substantially exceeded analyst estimates and the stock ran up 48% in three months.  See chart compared with HLSS.

Growth plan summary, morgtage originations

. 33% of aggregate outstanding loan balances in the servicing portfolio came from Texas, Indiana and Ohio. 
. SGM expects to grow its mortgage originations…by expanding into more states accounting for 45% of the nation’s origination volume.
. The nine states in which SGM is not licensed, including five states where SGM has a pending license application, accounted for $287 billion, or 15% of the nation’s residential mortgage origination market in 2012.
. The six states where SGM has become licensed since June 30, 2013, accounted for $590 billion, or 30%, of the nation’s origination volume in 2012.

Valuation

COMPARE

           

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

Profit

annualizing June 6 mos

Cap (mm)

Sls

Erngs

BkVlue

TanBV

Margin

Stonegate Mortgage (SGM)

$519

3.1

13.7

1.6

1.7

23%

Nationstar Mortgage Holdings (NSM)

$5,090

4.9

13.7

5.4

-1.0

36%

Home Loan Servicing Solutions (HLSS)

$1,620

4.7

15.6

1.3

1.3

30%

Conclusion

The IPO rating on SGM is neutral because the mortgage industry overall is not regarded as a high growth market, right now, and SGM appears to be priced within industry range.

Business

SGM is an integrated mortgage company that derives revenue from three principal sources: mortgage origination, mortgage financing and mortgage servicing.

The mortgage origination business generates income primarily through origination fees and gains upon the sale of mortgage loans sourced through correspondent, wholesale and retail channels.

SGM also provides financing to correspondent customers and others while they are accumulating loans prior to selling them to Aggregators, including SGM, through the mortgage financing business and SGM  earns interest and fee income for these services. SGM also have the ability to retain the Mortgage Servicing Rights on the loans SGM sells and to create a recurring servicing income stream in SGM’s mortgage servicing business.

Recent Industry Trends

Since June 2013, the U.S. residential mortgage industry has experienced an increase in interest rates. Industry-wide mortgage loan originations have declined as the recent increase in interest rates has made the refinancing of mortgage loans less attractive for borrowers.  Increasing interest rates can have a direct, negative impact on the operating results of companies in the mortgage industry

Mortgage originations

SGM is currently licensed in 39 states and Washington, D.C. including six states (California, Montana, Oregon, Rhode Island, Virginia and Washington) where SGM has become licensed since June 30, 2013 and have not yet commenced any material operations.

SGM intends to become licensed in 45 states by year end 2013 and to become licensed in the final three of the contiguous United States, New Hampshire, New York and Nevada, in the first half of 2014.

The nine states in which SGM is not licensed, including five states where SGM has a pending license application, accounted for $287 billion, or 15% of the nation’s residential mortgage origination market in 2012.

The six states where SGM has become licensed since June 30, 2013, accounted for $590 billion, or 30%, of the nation’s origination volume in 2012.

As SGM becomes licensed in these additional states and as SGM increases origination activity in the states where SGM has only recently become licensed, SGM believes its origination volume will increase substantially.

As of June 30, 2013, 13%, 11% and 9% of the aggregate outstanding loan balances in the servicing portfolio were concentrated in Texas, Indiana and Ohio, respectively.

Correspondent Channel

SGM acquires newly originated loans conforming to the underwriting standards of the GSEs or government agencies as well as non-Agency mortgage loans conforming to the standards of investors from the network of correspondents across 39 states plus Washington, D.C.

Correspondent origination volume has increased from $521.5 million during the six months ended June 30, 2012 to $2.8 billion during the six months ended June 30, 2013, or by 445%.

Growth has been driven by adding new correspondents as well as deepening relationships with existing correspondents. SGM’s correspondent channel represented 71% of mortgage originations for the six months ended June 30, 2013

Financing

SGM acquired its financing platform, known as NattyMac, in August 2012, and fully integrated the platform into mortgage banking operations in December of 2012. Founded in 1994, NattyMac earlier operated as an independent mortgage warehouse lender focused on financing prime mortgage collateral, such as Agency-eligible, government insured and government guaranteed loans that were committed for purchase by GSEs.

Following the acquisition, in June 2013, SGM consolidated its NattyMac financing platform into a wholly-owned subsidiary which will focus on providing warehouse financing to SGM, correspondent customers and others.

SGM intends for this to create an additional source of funding for correspondents to originate mortgage loans that meet underwriting requirements and are eligible for purchase.

Competition

In SGM’s servicing and originations business, SGM competes with large financial institutions and with other independent residential mortgage loan producers and servicers, such as Wells Fargo & Company, JPMorgan Chase & Co., Bank of America Corporation, Citigroup Inc., Nationstar Mortgage Holdings (NSM), PennyMac Financial Services, Inc., Ocwen Financial Corporation, Walter Investment Management Corp., Flagstar Bancorp, Inc. and U.S. Bancorp.

The large financial institutions, including Wells Fargo & Company, JPMorgan Chase & Co., Bank of America Corporation and Citigroup Inc., together serviced 48% of all outstanding mortgage loans on 1-4 family residences as of December 31, 2012. These traditional bank servicers, however, are experiencing higher operating costs and increased capital requirements

5% stockholders pre-IPO

Affiliates of Long Ridge Equity Partners, 41.5%
Glick Pluchenik 2011 Trust, 6.1%

Use of proceeds

SGM expects to net $136 million from its IPO from the sale of 7.1 million shares.  Shareholders intend to sell 1.5 million shares.

Proceeds are allocated to working capital and general corporate purposes.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
ENHT Enherent Corp 0.00 0.00 0.00 0
SGM Stonegate Mortgage Corporation 4.97 0.17 3.54 15,109

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