LDI - loanDepot: New Appointments Draw Attention (Rating Upgrade)

2023-10-12 11:48:54 ET

Summary

• I have a positive view of loanDepot, Inc.'s new appointments, which are aligned with the company's revenue growth and profit margin expansion goals.
• But a significant improvement in loanDepot's financial results for the short term is less likely based on a review of industry survey results and consensus financial forecasts.
• I raise my rating for loanDepot to a Hold, after considering the company's latest appointments, and the outlook for the mortgage industry and loanDepot.

Elevator Pitch

My rating for loanDepot, Inc. ( LDI ) shares is a Hold now.

I previously rated LDI as a Sell in my March 12, 2023 initiation article . In that write-up, I reviewed loanDepot's key Q4 2022 metrics and assessed the company's Q1 2023 guidance. Since my article was published in March this year, loanDepot's share price have fallen by -10.9% (source: Seeking Alpha price data) as compared to a +14.1% rise for the S&P 500 (SP500).

LDI has made two key appointments in recent times that are expected to boost the company's mid-term prospects, and this explains my decision to upgrade loanDepot's rating from a Sell to a Hold. However, the near-term financial performance for LDI is still expected to be impacted by weakness in the mortgage market, so the stock isn't worthy of a Buy rating yet.

New Position Established To Boost LDI's Top Line

Last month, loanDepot issued a media release revealing that it "appointed industry veteran Dan Hanson to a newly-created role as executive director of enterprise partnerships and acquisitions." In this announcement, it is highlighted that Dan Hanson will be tasked with "developing new revenue-generating opportunities" such as "accretive acquisitions, referral relationships and other strategic partnerships" in this new position.

LDI has both the experience and financial strength to execute on future M&A deals led by Dan Hanson.

In the company's fiscal 2022 10-K filing , loanDepot disclosed that it grew its presence in the "in-market loan officer channel" by buying over imortgage and Mortgage Master in 2013 and 2015, respectively. Looking forward, loanDepot has the financial capacity to engage in acquisitions, considering that the company had $719 million of cash and cash equivalents on its books as of June 30, 2023. At its Q2 2023 results call , LDI noted that it is "expecting to keep excess liquidity in the balance sheet" at the moment. This suggests that loanDepot has capital that can be deployed for M&A when such opportunities arise.

Separately, loanDepot has strong existing referral relationships and the company is now in a good position to establish new referral relationships with the help of Dan Hanson.

LDI emphasized in its FY 2022 10-K filing that the company boasts "referral relationships with several leading brands" which includes "one of the 10 largest U.S. retail banks." Partnerships account for about a fifth of loanDepot's originations in terms of volume, and they allow LDI to spend less on acquiring customers as compared to direct marketing, which represents the other 80% of its origination volume. Dan Hanson has worked in the mortgage industry for close to four decades, and his vast experience makes him the right person to expand loanDepot's referral relationship network.

In a nutshell, loanDepot's intermediate term revenue growth prospects have gotten better with the appointment of the new executive director of enterprise partnerships and acquisitions appointment.

Chief Human Resources Officer Will Play A Key Role In Expense Optimization Plans

A week before the company announced its Q2 2023 financial results in early August, Melanie Graper became LDI's new Chief Human Resources Officer at the end of July. The new Chief Human Resources Officer appointment is expected to provide support for loanDepot's cost control efforts.

In the press release announcing the appointment of Melanie Graper, the new Chief Human Resources Officer was described as someone with a "track record of" leading "nimble and effective organizations." LDI guided for "decreasing personnel-related costs due to lower headcount, G&A (General & Administrative) and other corporate expenses" and a fewer number of employees driven by "productivity gains" at its second quarter results briefing.

The number of staff at loanDepot has already decreased substantially by -45% YoY from 8,540 at the end of June last year to 4,683 as of end-1H 2023, as indicated in LDI's investor presentation slides .

It is reasonable to assume that loanDepot will become even leaner going forward as the company's human resource efficiency improves with Melanie Graper coming on board. As such, the new Chief Human Resources Officer appointment has boosted LDI's medium-term profitability outlook.

It's Premature To Turn Bullish

It is still far too early to be optimistic about loanDepot, even though I am encouraged by the company's new appointments as detailed in the preceding sections.

Industry surveys and consensus numbers suggest that the mortgage market remains weak and this will hurt LDI's financial performance in the short term.

A recent October 9, 2023 Seeking Alpha News article highlighted that the proportion of "consumers expressing pessimism about homebuying conditions hit a new survey high (84%) in September" based on a Fannie Mae ( FNMA ) survey.

Both LDI's top line and bottom line beat market expectations for the first two quarters of the current year. But the Wall Street analysts' consensus full-year FY 2023 revenue and normalized EPS were still revised downwards by -3.3% and -5.0% , respectively in the last three months.

Closing Thoughts

I award a Hold rating to LDI. On one hand, I have a favorable opinion about loanDepot's recent appointments. On the other hand, the mortgage market has yet to turn around, and this isn't the right time to be bullish on LDI yet.

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