This column originally appeared on Real Money Pro at 12:47 p.m. EDT on Aug. 8.
Yesterday, mortgage servicer Nationstar Mortgage reported a beat to second-quarter 2013 expectations and initially ticked much higher in premarket trading, changing hands as high as $53 a share, up $4. (Note: The shares closed yesterday at $50 a share and are now trading lower at about $49.15 a share.)
In my view, the gap was unjustified as the buyers and some of the sell-side analysts who applauded the report and the share price gap higher didn't appear to understand the quality of the earnings very well.I tried to short the stock but missed the trade. The reason I write this is because, among other liberal accounting recognition techniques, Nationstar utilizes a more aggressive gain-on-sale accounting in its earnings reports -- as such, I have an issue with Nationstar's quality of earnings. (I don't think this is well understood in the marketplace.) you will find in this column, if competitor Ocwen reported on a similar accounting basis (adding mortgage-servicing rights valuation adjustment and discount on advances), its second-quarter operating profits would have been over $400 million, and its pretax earnings would be $323.6 million compared to $199 million at Nationstar, rather than the reported pretax income of $87.5 million. If we further remove the impact of contribution to consumer relief fund, Ocwen's pretax income would have stood at $376.6 million vs. $199 million at Nationstar. Conversely, if Nationstar reported with the similar accounting conventions as Ocwen, taking out mortgage-servicing rights valuation adjustment and discount on advances, Nationstar's reported pretax income of $199 million would be adjusted and reduced to about $117 million. What follows is my more detailed analysis and calculation of how Nationstar's accounting policies differ appreciably with Ocwen's accounting.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV