UWMC - UWM Holdings: Company Should Maintain Its Competitive Advantage In 2023

2023-03-28 19:42:58 ET

Summary

• UWM Holdings Corporation is a top mortgage lender in the U.S. in terms of production volume and is constantly growing its market share.
• UWM Holdings registered a $284.1 million increase in the fair value of its mortgage service rights.
• The company realized a net income of about $931 million despite paying a cash dividend of $0.10 per share.

Mortgage lender UWM Holdings Corporation ( UWMC ) reported Q4 2022 revenue of $302.43 million, representing a decline of 50.05% (YoY). It beat estimates by $7.33 million, while its EPS of $0.00 missed Wall Street forecasts by $0.01. The company closed $25.1 billion of production or total loan origination volume during the quarter with about $21.7 billion of this volume emanating from purchases. Additionally, FY 2022 was its third-best production year with up to $127 billion in total production boosted by an expanding broker channel across the U.S.

Thesis

I believe that UWM Holdings Corporation is undervalued despite its share price trading 4% below its 52-week high of $5.03. The company is investing in people (workforce), technology, and the mortgage process to deliver optimum service to its brokers. Further, UWMC is committed to rewarding its investors with consistent dividends while growing its market share.

UWMC is a top mortgage lender in the U.S. in terms of production volume. Unlike other lenders, UWMC does not deal with clients directly and instead operates using a string of mortgage brokers. Since my last article , UWMC has gained 49.70% outpacing the S&P 500 (SP500) which is up 8.87% in the same period. While releasing the FY 2022 results, UWMC Chairman and CEO Mat Ishbia stated:

2022 was a historic year for UWM. Becoming the #1 overall mortgage lender in America, while originating mortgage loans exclusively through the wholesale channel, is a validation of our unrelenting commitment to the broker channel. We also delivered earnings of $931.9 million and have continued to reward our shareholders with consistent dividends.”

From my point of view, there has been tremendous effort put in by the company to grow loan originations despite the rising interest rates. U.S. mortgage rates rose 50 basis points in February 2023 to a 4% range. In turn, this rise caused mortgage applications for home purchases to drop to a 28-year low of 6% before the end of February 2023. The mortgage rates had been on a downward trend since they hit 7.08% in November 2022, giving a boost to mortgage activity in January 2023 before the drop later in February 2023.

Lower Home Prices

In 2023, we are likely to see an increase in home mortgage applications considering the decrease in U.S. homes in Q1 2023. According to the National Association of Realtors report , median existing prices for U.S. homes in February 2023 stood at $363,000 down 0.2% (YoY). In my view, this decline is not the bottom for home prices and we are likely to perceive a continued price correction in 2023. Annualized home sales dropped 22.64% (YoY) to 4.58 million units from 5.92 million.

However, the decrease is still too small to indicate a no-reverse procedure and we may likely see further increases, in case the Fed decides to lower rates. UWMC is well conscious of the volatile mortgage rates which home buyers will take advantage of (in case of rate declines). It is expected that there will be robust gains in sales in locations where home prices will be on a continual decline. Additionally, a boost in the local economies will see more jobs, thereby supporting the uptake of mortgages.

Why UWMC is undervalued

The trailing P/E ratio GAAP ((TTM)) of UWMC is 10.91, about 13.60% above the industry average of 9.60 while the forward P/E stands at 17.90. With the current price below $5, this means the market is gearing for an upsurge of more than 100%.

It is also vital to consider that while the company's annual net income fell 41.8% (YoY) to $931.9 million in 2022, it registered a $284.1 million increase in the fair value of its mortgage service rights (MSRs). This point is important, since it posted a decline of $587.8 million in the fair value of its MSRs in 2021 even though the net income at the time was a high of $1.6 billion. The increase in interest rates in 2022, led to a decrease in prepayment, which in turn caused the value of the MSRs to increase. The increase in MSRs means that UWMC is creating a stronger hedge on the supply side of its mortgage lending business, especially since it uses brokers.

Online lender Rocket Companies, Inc. ( RKT ) in its FY 2022 report indicated that its MSRs at fair value rose 28.98% (YoY) to $6.947 billion in the year. Alongside its $3.1 billion of undrawn credit and a cash balance of $3.3 billion is an undrawn MSR line of $1.7 billion. These numbers are impressive getting into 2023, since the company’s advertised rates are slightly higher than the national averages.

UWMC also reported that it achieved an 8% share of the overall mortgage market in FY 2022 and it also closed the year with a 38% share of the wholesale channel. This statement is worth noting since the company realized an increase of $3.5 billion or +4% (YoY) in its purchase originations to $90.8 billion in 2022. The increase in the market is a result of investing in technology such as Game On to augment the broker channel giving them a competitive edge.

UWMC is also comfortable paying a $0.10 per share cash dividend (for 9 consecutive quarters now) representing about 8.30% dividend yield ((FWD)) into 2023. The company still realized a net income of about $931 million after this payment, showing how competitive it is in the market. The CEO also believes that its market share of the broker channel may reach 40% by 2026 from the current forecast of 30%.

Risks to Consider

UWMC’s mortgage originations fell 25.07% (QoQ) in Q4 2022 to $25.1 billion from $33.5 billion and also registered a 54.53% (YoY) decline from $55.2 billion attained in Q4 2021. These originations were hardest hit in full-year analysis after they dropped 43.8% (YoY) to $127.3 billion from $226.5 billion recorded in 2021.

Q4 2022 saw UWMC suffer a net loss of $62.5 million against a net income of $325.6 million in the previous quarter. This loss included a $151 million decline in the company’s fair value of mortgage servicing rights (MSRs).

Additionally, the rising interest rate environment may lead to mortgage affordability concerns since UWM Holdings Corporation is also experiencing rate buy-downs from borrowers.

Bottom Line

In my view, UWM Holdings Corporation is a strategic company to invest in due to its opportunistic business tendency. The company has strong liquidity due to a robust MSR book despite the decline in net income in 2022. I believe UWM Holdings Corporation stock is poised for a 100% uptick in the long run buoyed by the growth of its broker channel. For these reasons, I propose a buy rating for UWM Holdings Corporation stock.

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