Rocket Companies Earnings: Lower Spending and Better Margins Partially Offset Low Volumes

Narrow-moat-rated Rocket Companies RKT reported decent third-quarter earnings that were in line with our expectations as the company continues to be affected by weak mortgage conditions industrywide. Adjusted net revenue increased 12.8% from last year but was effectively flat sequentially at $1 billion. The company continues to benefit from its cost-cutting efforts, with the company flipping to an adjusted net gain of $7 million from a loss of $166 million last year. As we incorporate these results, we do not expect to materially alter our $13 per share fair value estimate. We see the shares as undervalued on a full-cycle basis, but near-term results will remain weak until mortgage rates fall, given that Rocket is so highly leveraged to the mortgage cycle.

Mortgage origination volume, the largest driver of Rocket’s business, fell 13.2% from last year but was effectively flat from last quarter at $22.2 billion. High mortgage rates in the U.S. have caused mortgage refinance activity, historically Rocket’s strong point, to collapse and have placed major pressure on purchase volumes. While we expect conditions to improve eventually for Rocket, mortgage origination is an inherently cyclical business and until mortgage rates normalize major headwinds will remain for the company.

On a more positive note, Rocket’s average gain on sale margin improved for the third time in a row, rising to 2.76% from 2.69% last year and 2.67% last quarter. While the firm is still being hurt by difficult industry conditions, it does appear that the worst of the margin pressure is behind us as capacity in the industry decreases.

Additionally, while revenue has declined dramatically from its peak, Rocket remains in a healthy financial position because of significant cost-cutting and a strong balance sheet. Operating expenses declined 8.7% from last year to $1.09 billion. The firm now expects annualized cost reductions to come in at the high end of its original $150 million to $200 million range.