LDI - loanDepot: Q1 2023 Guidance Was Disappointing

2023-03-12 05:35:12 ET

Summary

• loanDepot's Q1 2023 origination volume guidance of $3-$5 billion came in significantly below the market's consensus estimate of $6.2 billion.
• There is a reasonably high probability of loanDepot staying loss-making for fiscal 2023 based on my interpretation of the company's financial guidance and management commentary.
• I assign a Sell rating to loanDepot, taking into account LDI's near term financial outlook and my price target for the stock.

Elevator Pitch

I have a Sell investment rating assigned to loanDepot, Inc.'s ( LDI ) stock. LDI's disappointing first quarter origination guidance, and a high likelihood of continued losses for the company in this year explain why I have decided on a Sell rating for the company's shares.

Company Description

On the company's investor relations website , LDI calls itself "one of the nation's largest nonbank retail mortgage lenders." The company credits its leading position in the mortgage market to its "proprietary end-to-end technology platform (known as mello)", its "data analytics capabilities and nationally recognized consumer brand" as highlighted in its 10-K filing . LDI's shares were listed on the New York Stock Exchange since February 11, 2021 .

Q4 2022 Key Metrics For loanDepot

LDI revealed the company's financial performance for the fourth quarter of 2022 on March 8, 2023 after trading hours.

The top line contraction for loanDepot worsened from -60.4% YoY for Q2 2022 and -70.3% YoY for Q3 2022 to -75.9% YoY in the most recent quarter. LDI's actual Q4 revenue of $170 million turned out to be roughly -14% below the sell-side's consensus top line projection of $196 million.

It is understandable that LDI's Q4 2022 top line performance was poor taking into account weak mortgage demand. An earlier November 21, 2022 Seeking Alpha News article had cited a survey from New York Fed highlighting that consumers in the US are "less likely to apply for an auto loan, mortgage, or mortgage refinancing within the next 12 months."

LDI's pull through weighted gain on sale margin declined by -60 basis points from 2.81% in Q4 2021 to 2.21% for Q4 2022, and this was lower than the mid-point of the company's earlier guidance at 2.40% . As per the company's Q4 2022 results release , loanDepot defines pull through weighted gain on sale margin "as the sum of "gain on origination and sale of loans, net, and origination income, net" divided by "the pull through weighted rate lock volume."

loanDepot also reversed from a positive EBITDA of $64 million in Q4 2021 to realize an EBITDA loss of -$95 million for Q4 2022. The company's actual fourth quarter EBITDA loss was wider than the analysts' consensus estimate of -$73 million. Net loss attributable to shareholders for LDI also widened QoQ from -$60 million for Q3 2022 to -$77 million in the final quarter of the prior year.

LDI's Q1 2023 Origination Volume Guidance Fell Short Of The Market's Expectations

The company expects to deliver origination volume in the $3-$5 billion range for the first quarter of this year.

This implies that loanDepot's origination volume could potentially halve QoQ based on the lower end of the company's management guidance; LDI's Q4 2022 origination volume was $6.4 billion.

Prior to its Q4 2022 results announcement on March 8, 2022, the sell-side analysts had anticipated that LDI's Q1 2023 origination volume will be $6.2 billion or +55% higher than the mid-point of the current guidance provided by the company.

loanDepot acknowledged at its Q4 2022 results call that "I don't think we've seen capacity come out quite as quickly as we would have thought", in response to a question on whether "supply has caught up." This suggests that it might take a while for demand-supply dynamics in the mortgage market to turn favorable again.

Company Is Expected To Be Loss Making Again In 2023

LDI suffered from a GAAP net loss attributable to shareholders of -$273 million in FY 2022, and Wall Street sees loanDepot reporting a GAAP net loss of -$172 million for FY 2023 based on consensus forecasts sourced from S&P Capital IQ .

The market's expectations of loanDepot being unprofitable for 2023 seems to be reasonable. As discussed in the preceding section, LDI is guiding for a substantial QoQ drop in its origination volume for the first quarter of the current year, and its Q1 2023 guidance came in below the consensus estimate. Also, loanDepot has guided for its pull through weighted gain on sale margin to contract from 2.21% in Q4 2022 to 2.00% for Q1 2023 as per the mid-point of its guidance.

loanDepot's Vision 2025 Plan

Separately, expense optimization alone won't be sufficient to enable LDI to return to positive earnings territory this year. loanDepot admitted at the company's most recent quarterly investor call that "getting to a run rate profitability continues to be a North Star under the Vision 2025 (as highlighted in the chart above)." It also seems unlikely that the mortgage market will see a strong and swift recovery in 2023; Fannie Mae is projecting a -28% drop in mortgage originations for the current year.

Concluding Thoughts

I rate loanDepot's shares as a Sell considering both its Q4 2022 performance and Q1 2023 guidance. My price target for LDI is $1.25, which translates into a potential downside of -29% from current levels. I arrive at loanDepot's target price by applying a 0.5 times price-to-tangible or P/TBV multiple to its consensus end-FY 2023 TBV of $2.50 (source: S&P Capital IQ ).

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