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

So there's plenty of good news on the servicing front, as Nationstar continues to ride the industry trend and gobble up servicing rights. On the other hand, the company's loan origination business can't escape the negative industry trend, as the wave of mortgage loan refinancing activity in the United States subsides. Refinancing volume had spiked as a result of prolonged low-rate environment promulgated by Federal Reserve policy and because the government's Home Affordable Refinance Program. The program, known as HARP, helped qualified borrowers with loans held by Fannie and Freddie fully refinance their mortgage loans, even if the value of their homes had dropped significantly lower than the loan balances.

The Mortgage Bankers Association estimates U.S. refinance volume will decline from $1.456 trillion in 2012 to $1.083 trillion in 2013, with an even sharper decline to $463 billion in 2015. The MBA expects total one-to-four family mortgage volume to decline from $2.044 trillion in 2012 to $1.745 trillion in 2013 and $1.186 trillion in 2014.

Sticking with Nationstar

Following Thursday's drop in the share price, investors are looking at "an attractive entry point" for Nationstar, on the strength of its growing servicing business, according to Oppenheimer analyst Ben Chittenden. The analyst in a note to clients late Thursday also said that it was "not a point to sell for existing shareholders."

Chittenden stuck with his "outperform" rating for the stock, but lowered his 12-18 month price target for the shares to $50 from $62, while lowering his 2013 EPS estimate to $3.05 from $4.80, and lowering his 2014 EPS estimate to $5.50 from $7.31.

"We think this is the fundamental silver lining on an otherwise weaker quarter. Servicing will drive the vast majority of future earnings power; with profitability increasing, we view that as a positive," Chittenden wrote. He was also impressed with the growth of Nationstar's "high margin" SolultionStar subsidiary, which focuses on real estate sales and settlement services. This unit's revenue third-quarter revenue rose 34% sequentially to $51 million in the third quarter.

FBR Capital Markets analyst Paul Miller on Friday also stuck with an "outperform" rating for Nationstar, although he lowered his price target to $45 from $65, "given a 2014 EPS expectation that is nearly one-third below our prior estimate."
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