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Analysts Still Love Nationstar After 17% Drop (Update 2)

Updated from 11:52 a.m. ET with market close information -- including a further decline for Nationstar's shares -- and comment from Morgan Stanley analyst Cheryl Pate.

NEW YORK ( TheStreet) -- Wall Street analysts have lowered their price targets for Nationstar Mortgage Holdings (NSM - Get Report) to reflect market reality, but several are still upbeat on the stock.

Nationstar's shares sank 17% Thursday to close at $40.75, after the company significantly lowered its 2014 earnings guidance to a range of $4.50 to $6.00 a share from its previous guidance of $6.45 to $7.50 a share. The shares dropped another 10.5% Friday to close at $36.48.

The company operates in two business segments: mortgage loan servicing and mortgage origination and sales.

Nationstar CFO David Hisley said in the company's third-quarter earnings release that the company was "not immune" to the decline in mortgage refinance applications and the decline in mortgage gain-on-sale margins, brought about by an increase in long-term interest rates.

The company reported third-quarter earnings of $81.5 million, or 91 cents a share, compared to $123.5 million, or $1.37 a share, in the second quarter and $55.1 million, or 61 cents a share, during the third quarter of 1012.

The sequential earnings decline reflected a decline in gains on mortgage loans held for sale to $206.0 million in the third quarter from $282.6 million the previous quarter.

The company also announced it would sell its "non-core wholesale and distributed retail origination channels to Stonegate Mortgage (SGM)" this month. Stonegate said it would pay "net book value" for the unit's assets.

The year-over-year earnings improvement reflects an increase in fee income to $425.9 million in the third quarter from $145.6 million in the third quarter of 2012, as the company grew its portfolio of serviced mortgage loans to $375 billion as of Sept. 30 from $198 billion a year earlier.

Nationstar, along with other servicing specialists including Ocwen Financial Corp. (OCN - Get Report), is rapidly expanding its servicing operations as the largest U.S. mortgage lenders make massive sales of loan servicing rights, in order to move away from a part of the business that has given them so much grief in the wake of the credit crisis.

The company in January agreed to purchase mortgage servicing rights for 1.3 million loans with unpaid balances totaling $215 billion from Bank of America (BAC). Completing the deal is complicated, because the loans in the serviced portfolio are held by several different parties. During the first quarter, servicing rights on 47% of the Bank of America-serviced portfolio was transferred to Nationstar. Those were loans held by Fannie Mae (FNMA) and Freddie Mac (FMCC). During the third quarter, servicing rights on $62 billion in private label loans -- that is, those that can't be sold to Fannie or Freddie -- were transferred to Nationstar.
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