While facing continued pressure from its largest investor for a management shakeup, CoreLogic expects to benefit from continued mortgage refinancing activity, internal cost cutting and the introduction of new products. In a March 22 research note following Barclays analysts’ meetings with CoreLogic CEO Anand Nallathambi and senior vice president of investor relations Dan Smith, the analysts wrote that they believe there is long-term upside for the Santa Ana, Calif.-based company and its stock. In the near term, if the pace of refinancing volume in the first quarter continues throughout 2012, the mortgage origination market will be above $1 trillion to $1.1 trillion, “suggesting 1Q results are positioned well versus guidance,” wrote lead analyst Darrin Peller.
As increased regulations impact underwriting standards for lenders, banks continue to demand more data and analytics to determine potential borrower risk, “a secular trend we believe may support long-term upside,” for CoreLogic, Peller added.
The report notes that CoreLogic’s data and analytics division could see a double-digit growth rate from the introduction of new products and pricing power.
According to the report, CoreLogic is developing new credit risk models that combine traditional scoring methods with its proprietary data to analyze consumer credit.
CoreLogic recently said a new service runs a rules engine against servicers’ borrower data to determine mortgages that meet the criteria of the recently enhanced Home Affordable Refinance Program, called HARP 2.0, to identify underwater loans that can be refinanced under the federally backed servicer incentive program.
The technology combines the HARP 2.0 requirements, database filters and CoreLogic’s automated valuation models and other data to create a lead list for servicers that includes borrower contact information, and loan and property data on outstanding mortgages in a portfolio.
In addition, the return of private-label mortgage investors has the potential to increase the demand for similar data and analytics to deter mortgage fraud and analyze loan risk.
Still, the company faces pressure for a change at the top, most vocally from Boston-based Highfields Capital Management, which owns a 7.7% stake in CoreLogic and has been critical of its performance and decision to end a strategic review and possible sale plans.
In what appears to be an attempt to appease Highfields, CoreLogic announced on March 19 that it would expand its board of directors, hiring executive search firm Spencer Stuart to help place two new independent members to the board and postponing its annual stockholder meeting in order to let shareholders vote on the candidates this year.
But in a statement released after the announcement, Highfields CEO Jonathon Jacobson called the decision disappointing, and said that adding two directors “will not alter the fact that the board continues to be controlled by the same six directors hand-picked by the current or former chairman and will not result in a change in board leadership.
“CoreLogic needs a board with the collective professional skills and experience necessary to capitalize on the company’s unique assets and ensure that management is held accountable for performance.,” he said
A CoreLogic spokesperson declined to comment about the Highfields statements.
The Barclays note makes no reference to the discord between CoreLogic’s board and Highfields, a dispute that goes back at least to the beginning of 2011, when Highfields officials first voiced concerns about CoreLogic’s board, according to a July 2011 letter Highfields sent to CoreLogic chairman D. Van Skilling and publicly released on March 5.
Meanwhile, CoreLogic continues to focus on its cost-cutting efforts with “Project 30,” an internal initiative to reach adjusted earnings before interest, taxes, depreciation and amortization margin of 30% by the end of 2013.
CoreLogic reduced costs by $20 million in 2011 and is projecting additional cuts of $80 million to $100 million through the year 2013.
In addition, Barclays said its meetings with CoreLogic management indicate that the company will pay down $100 million of its debt in the first half of 2012.
“We suspect achievement of this goal could provide a possible opportunity for share repurchases starting in 2H 2012,” the report said.
But Barclays believes improvement in the overall mortgage industry and the operating leverage embedded in Project 30’s model will drive success with the initiative more than cost cutting.
The report cites that the refinance market in 4Q11 pointed to an annualized market volume in the $1.4 trillion to $1.5 trillion range and yielded EBITDA margins of nearly 31% for CoreLogic’s origination services segment—compared to 2009, when market originations were nearly $2 trillion and netted CoreLogic EBITDA margins of 34%.
“In other words, a long-term trend toward what we’d deem a more normalized origination market (about $1.5 trillion) could itself provide compelling support for CLGX’s margin targets, leaving aside savings from specific cost initiatives,” Peller wrote.
In 2011, CoreLogic actively engaged in acquisitions—most notably mortgage technology vendor Dorado and Australian valuations provider RP Data—and disposing of certain units, including selling its outsourcing unit to Cognizant and the wind down or planned sale of five other units.
But Barclays said CoreLogic does not expect to make any acquisitions of material size near-term. “We believe smaller tuck-ins in the $20 million to $30 million range may be possible, though not a near-term focus for capital allocation,” Peller wrote.
