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LPS Seen as Buyout Candidate

Lender Processing Services story updated with Oppenheimer upgrade and new share price data.

NEW YORK ( TheStreet) -- Lender Processing Services (LPS) is a "textbook" candidate for a leveraged buyout, according to an analyst who follows the company, which saw shares rise 1.45% to $25.91 Thursday following first-quarter earnings that were largely in line with analyst estimates.

Lender Processing Services, based in Jacksonville, Fla., provides services and technology to home lenders and servicers including JPMorgan Chase (JPM), Wells Fargo (WFC) and Nationstar (NSM). It earned $53.9 million, or 63 cents per share in the first quarter compared to $47.1 million, or 56 cent per share in the first quarter of 2012.

Revenue fell by 2.9% to $471.7 million vs. a year ago as declining foreclosure activity hurt the LPS business unit providing foreclosure-related services. However, a separate unit, known as Technology, Data & Analytics, showed improved revenues and drew praise from analysts on Thursday's call.

Earlier this year, LPS settled with Attorneys General in 46 states over sloppy documentation and other errors tied to mortgage servicing, agreeing to fines of $128 million. It paid an additional $35 million to resolve a criminal fraud case with the U.S. Justice Dept. in which the former CEO of an LPS subsidiary called Doc X LLC pled guilty last year to conspiracy to commit mail and wire fraud. LPS wound down Doc X's operations as part of the "non-prosecution agreement."

Certain issues remain outstanding, including a suit brought against LPS by Nevada's Attorney General. LPS also continues to operate under a "consent order" brought by federal banking regulators.

However, BTIG analyst Mark Palmer says these issues don't pose a serious problem for LPS. He expects the Nevada case to be settled for a figure "in the single digit millions," and he does not expect the consent order to result in monetary damages.

"It's more that the government wants to see the company put fail-safes in place," to guard against future violations, Palmer says.

"I look at LPS as a textbook leveraged buyout," Palmer says. "The only question in my mind is whether a private equity firm would opt to wait until after the remaining legal issues have been resolved before taking over the company. I feel like they are far enough along in that process that a private equity firm, particularly a sophisticated one that could understand exactly where LPS was with regard to the path toward resolution would be able to get their hands around that risk and still move forward with a buyout."

Palmer believes a buyout firm would find LPS attractive because its debt of $1.068 billion is less than two times its EBITDA over the last 12 months of $544 million. A buyout firm could comfortably double that ratio to finance an acquisition, he argues.

LPS got further positive momentum Friday following an upgrade from Oppenheimer to "outperform from "perform.

"We believe the TD&A business has an attractive growth and profitability outlook, but is underappreciated and masked by the rapid deterioration since FY10 within Default Services," Oppenheimer's analysts wrote. Shares were higher by 2.16% to $26.47 shortly before noon on Friday.

Other analysts are more skeptical, however. Julio Quinteros of Goldman Sachs, who is neutral on LPS, complained that "visibility into the second half of 2013 remains limited."

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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